Destiny Media Technologies Inc. (OTCQB:DSNY) Q1 2023 Earnings Conference Call January 17, 2023 5:00 PM ET
Company Participants
Fred Vandenberg – Chief Executive Officer
Allan Benedict – Head, Business Development and Marketing
Operator
Hi, everyone. Thank you for joining us on today’s webinar. Before we begin, I’d like to announce that we will be referring to today’s earnings release, which was sent to the newswires earlier this afternoon.
I’d also like to remind everyone that this conference call could contain forward-looking statements about Destiny Media Technologies within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon current beliefs and expectations of management and are subject to risks and uncertainties, which could cause actual results to differ materially from those forward-looking statements. Such risks are fully discussed in the company’s filings with the SEC and SEDAR and the company does not assume any obligation to update information contained in this call.
During the webinar, we will discuss certain non-GAAP financial measures. The non-GAAP financial measures are presented in the supplemental disclosures and should not be considered in isolation of or as a substitute of or superior to the financial information prepared in accordance with GAAP and should be read in conjunction with the company’s financial statements filed with the SEC and SEDAR. The non-GAAP financial measures used in the company’s presentation may differ from similarly titled measures presented by other companies. A reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures can be found in the earnings press release.
[Operator Instructions] With that, I would like to turn the call over to your host, Fred Vandenberg, Chief Executive Officer.
Fred Vandenberg
Thanks, Rebecca. Good afternoon, everybody. Today, we have myself, Fred Vandenberg, and Allan Benedict, who leads our business development and marketing teams. I will take you briefly through the summary of operations and financial results for the quarter and some revenue driver discussions. And then I will turn it over to Allan to talk about business development efforts.
We are going to follow a format that’s similar to what we did at year end with a slight simplification and modification to just how we form the narrative on growth. And then Allan – when Allan has done the conversation on business development, he will turn it back over to myself to talk about things looking forward.
For the quarter – sorry, I missed a slide there – for the quarter, revenue fell by 10%. The majority of this decline is the decline in the value of the euro. It hit us a little bit hard there. It’s starting to come back towards the end of the quarter. The secondarily independent revenue from sales fell generally. We think that this is a function of government funding associated with COVID that impacted smaller artists running out post-pandemic. But I think Allan will touch on that a little bit more.
On the positive side, our major label revenue is up 5% after adjusting for FX. We think this is a sign of the growing value that we are providing. This is really on the strength of solid growth with both Warner and Universal globally. EBITDA for the quarter is $324,000, about 32% net EBITDA margin. Now one thing I want to mention here is the capitalization of software development costs, which was about $248,000 for the quarter. These are – this is really for new products and services that we are developing and we think it will provide long-term additional value.
We are really investing for growth in the core Play MPE platform and with new services. Income similarly was up to $258,000, up 56% from previous quarter. The overall expenditures have declined by 25% in part because of favorable FX. If you look at the P&L solely, salary and wages are down 22% and that’s by far our largest component of costs. Some of that is favorable FX. When it comes to FX, the euro is down relative to the U.S. dollar affecting our disclosed revenue. Similarly, the U.S. dollar is higher relative to Canadian dollar, which is impacting our costs. So salary and wages going back is down 22% for the quarter. Some of that’s FX, some of its lower staffing, we are not cutting costs here, we are just trying to make sure we are spending where we get a return.
Overall, if you include capitalized software development costs, salaries and wages were up 4%. And again, this is because we are making a significant investment in new products and product development generally. One thing I think people have noticed is the drop in sales and marketing costs. This is associated with salaries and wages. I will touch on it lightly. There were real reductions in staffing. As I described a little bit before, but there is a lot of movement of resources over to product development and there is the FX impact as well. So that’s the overall expenditures plus capitalized investments is actually down 3%, that’s just including all P&L items.
We have discussed business development or product development in the past as something that can really heavily influence our ability to grow and that’s by new products or services or by adding things that facilitate growth within the platform. The difference makers here are really platform changes, improvements, product development is – platform development is something that really is something that I think we can – that can heavily influence our ability to grow. Recently, over the recent few years, we have really focused on things to make the platform easy to use. It’s really moving it from a PC based platform over to a web-based platform. And then, more recently, it’s building out the global admin features for Universal. These global admin features really don’t impact our ability to grow at least directly. But they were to grow within Universal, I would say.
When we talked about our platform in the past and it can refer to you to Q4. The platform itself has really four main components. And I think I went into that to describe how the platform works and how we are going to grow. But it’s what I wanted to do this quarter is, is really talk about – talk about it from a very simplified way. And I think if you look at the things that will influence our ability to grow with Play MPE, you look at these three main things, releases, and if you want to draw a metaphor, it will think of us as like a FedEx or post office or something and releases are the package. So the more packages we send, the more revenue we will get. And then similarly, the more destinations you send that package to, you will drive up revenue. The third one, the value-added component is really where the metaphor might not be perfect or where it breaks down a little bit. But it’s really just things that enhance the overall effectiveness of the delivery. With FedEx, it’s either it gets there, it doesn’t, maybe it has insurance or something like that or read receipts on the other end or something. But this is where Play MPE probably has a bigger impact when it comes to things that we can add there.
So what I wanted to do is spend a little bit of time discussing how these components, what things we are working on, how these components can influence our revenue growth. The first – in the first section, there is really a bunch of things here. The self signup checkout, that’s really an ability for a customer to sign in and select their list, prepare release and checkout and pay. We don’t currently have that and it’s a bit of a bottleneck to sales right now. Lead conversion, lead automation, growth in new markets, Allan will talk about these a little bit more in depth. But these are things that are improving – helping us improve our growth recipient sourced content requests. That’s again more of a product in platform communication, where if you get a song from an artist and you want more from that artist or more similar things like that, then you can generate the recipient request – recipient-sourced content request. We do get those, but they are – right now, they are word of mouth where a programmer or something like that will tell the artists to send it through Play MPE. That’s our – actually our best source of leads. But we want to do that in a more technical manner. There is other things here, archived releases, that’s really a feature that we added not this current year like this – but we added it last year and it’s really a way to send more content that you don’t want to spend the same amount of money on, you do bulk distributions. And then a reporting, there is certain things that I think we can do without getting into a tremendous amount of detail here. The reporting, we can structure it in a way that reinforces the sale. So, that improves client retention and or resending content or resending more from that same artist that sort of thing.
In the second leg of this stool, we will talk about destinations. Now, the biggest parts here are expand our list offering and recipients, we provide the most expensive recipient lists in the world by any competitor that we have by far, but we also have a lot of recipients that are using Play MPE that we don’t know who they are and they are not on our list. And we think that if there is certain things we can work on within the platform, technical solutions that will expand our recipient base at least the ones we facilitate distributions for. This is really something that I want to spend just a bit more time on, because it’s important. Recipient lists, providing recipient list is critical to our – much of our independent sales. And I mentioned this at the year end, where the majority of our distributions use our lists. And that’s because a lot of times customers don’t know who to send to. And quite frankly, our lists are great. They are current. They are updated. They are accurate. But it is a bottleneck to growth. The faster we can expand our recipient list base we can grow revenue. And that’s – we think that’s a technical solution within the platform.
Also in there is list selection improvements. So, there is a few things that we have already been working on descriptions of our lists. They tell you who we are sending to making those lists easier to select in the platform. Right now, it’s not particularly easy. It’s not easy to select an international list. If you have a country distribution, for example, you got to hunt and search through it. We are in – we have just designed an improvement there. We have got to build it out yet. Last quarter, we mentioned international lists. We have started providing those international lists for certain genres of music. We think we can keep building those out. Recipient feedback things, I am – there is like you can use feedback within the platform to generate larger distributions. That’s like people requesting content that sort of thing.
Automated list expansion reports. That’s something where if a release is doing well, maybe you want to consider sending it more broadly around the world. We have already generated those reports. It’s once that report is generated it then becomes a manual process for sales to follow-up, but we can automate that. And then list management efficiencies that’s really just doing things that help our list management services department manage more lists. Value-added services, this is – when we talk about the global administration functions for Universal, this is really where they would lie. For the most part, that’s a little bit oversimplification, but there is lots of things we can do here that will enhance the distributions for smaller clients as well.
International e-mails what I mean by that is languages. Right now, the player and the distribution software is translated, but the e-mails aren’t. And I think I will mention only Quick Share here. Quick Share is a kind of exactly what it sounds like. It’s an ability to share a piece of content really quickly. And we see that it’s more for one-off sending like if you are standing next to somebody and they want to receive a piece of content, you just can quickly share it. We have – we are in beta starting well, probably next week for that. We are just testing it internally right now. We think that’s going to provide some incremental revenue for people who want to do that and then re-enhance the platform as it is.
I will leave it there, because it’s a little bit longwinded, but there is just a tremendous amount of things that you can see that we are working on. And I think what’s probably obvious is that a lot of these things are within platform improvements. And that’s why we are spending up more and more on product development. We have – we are kind of focusing in on the self-signup, self-checkout. So that’s getting more customers with an easier ability to signup and then sending, making it easier for that those customers to send to more recipients. So this is sort of the two main thrusts there. And to deliver faster we have made a change in our product development group to restructure it. So we think we are going to be able to deliver updates faster and in the right priority. Basically, we are focusing in on the quickest way to cash basically focusing on revenue generating things.
With that, I will turn it over Allan.
Allan Benedict
Thanks, Fred. Good afternoon, everyone. Happy New Year. Before I get into wider updates and similar territory strategies for things like the Latin market in Canada, I wanted to expand a bit on the independent revenue that Fred touched on earlier. So generally, we look at independent revenue is any client that isn’t a part of one of these three major label systems. So, this covers everyone from independent artists up to labels of essentially any size that aren’t affiliated with either Universal, Sony or Warner. Due to this classification, there is some extra contents or context – excuse me on the revenue that’s really helpful to understand.
Going through the revenue at a very granular level shows that, as Fred mentioned, this quarters decline has almost exclusively been from independent artists and very small operations, such as management firms with one client or clinical labels that have one or very, very few artists on their rosters. And this decline is not seen with our label and promotion agency clients how they consistently put through releases on a weekly or biweekly or sometimes monthly level. The reason for the change with artists in these very small operations is somewhat an after-effect of the pandemic and the hit that the music industry took during it.
Over the last year, year and a half, there has been a large amount of federal relief funding through things such as PPP loans in the U.S. some grants in other territories as well. And all of that funding has been available to artists for the first time in some situations. So while they weren’t able to tour much of their spend and this budget that they had was reallocated from going out on the road to either creating new contents or marketing past contents that they hadn’t sent out wide before. Essentially artists had to pivot to any avenue that could generate revenue for them, which was often radio or press or music supervision or something like that. So these artists essentially had more to spend than ever in the past. We have seen quite a few examples of this. For instance, one management company who I call it a management company it’s really one artists team. They took their federal funding and decided to put out all of that artists pass content globally in September, October of last year and that resulted in a single spend of nearly $10,000. Similarly, many other artists had the sudden budget to send the release internationally as opposed to keeping it in within their usual territory, their home territory and this past fall, without additional federal funding coming in and some of those programs kind of dwindling, many artists and small operations needed to become a bit more budget conscious and their total spend per release declined from the year prior.
And I am sure the next logical question as well as the funding slowed, but touring began to open up as the world kind of opened up, then that revenue would have replaced the funding. That’s not exactly the case with these smaller artists. So with touring shutdown for so long, many of the opportunities coming out of the pandemic when venues and tour agencies reopened, they were given to the larger artists with more support behind them either as a following or just the team behind them. So independence ran into almost a bit of a catch-22, where they didn’t have the additional funding that they did during the pandemic, but also couldn’t book the tours that they are hoping for. For instance, we have been speaking to our partners in Australia and this hit there almost more than any other territory. Many of the opportunities when Australia began to open the borders were given to international touring acts that had to cancel tours in 2020 or early 2021 and the independents had trouble securing these routings.
Another after effect of COVID was just a general kind of lighter release schedule for some labels, even labels with larger rosters and larger teams, they saw fewer releases this past fall as much of their roster had released that new content in early 2022. And we are now essentially off album cycle while they record new content for this year and next. We discussed with numerous of our clients and we are very confident that we will see return to the norm very shortly. We have also made advances internally that we believe will improve revenue from individual artists as well as those label clients.
One of these advances is on our new marketing website that we launched publicly on November 1st. We basically stripped everything away from the old site and redesigned it from the ground up with the key point of making sure as we optimized, making sure the flow from getting to the website to requesting that demo and requesting more information was easier and smoother for the artists. And we also gave more detail to the value prop that that Plan B offers. Lead flow through the website has never been greater, we saw a roughly 20%, 22% increase already in this quarter compared to last fiscal with still obviously a month and a half to go. Lag time in lead conversion and the sales process sometimes appears due to the onboarding process, and things like artists planning ahead for at least it’s actually coming out a month or two months down the line, or maybe they are just kind of getting their head around the process and trying to plan it with their team. But with these new generated leads and some of the other optimization we have done, we have seen conversions begin to increase and pick up it’s just in so far in January alone, it’s up nearly 30% compared to last January.
And towards the end of October, we did have a team member depart the business development team, which put us in a bit of a short staffed situation over the holidays, which also contributed slightly to the prolonged onboarding process. We have since made sure that we have the right team in place for our goals and our priorities moving forward that Fred will touch on. And as of this week, we are again fully staffed and we don’t see – foresee this as an issue moving forward for a number of reasons. One of them being the new lead response automation that I think we have touched on in past calls as well. So, that automation, we fully launched it this past December, and it was designed to really try to dig in and optimize our onboarding process.
We know that Plan B is somewhat complicated business for some independent artists and small teams to understand, so we took a magnifying glass to the process and the information to make sure that everything they need is delivered very clearly and concisely from their initial contact and hopefully that kind of advances the conversion conversation as it goes. This has been a collaboration between both our business development teams and our operations team. And we are very excited for what even further synergy there can mean for the future.
Digging into some specific territories in the Latin sector, as you know from previous quarters and previous versions of this call, we spent the last year or so growing our presence and list offerings in Central and South America and the greater Latin market. The majority of our efforts have been around growing recipient lists and providing a distribution outlet to clients looking to target those territories. Now, we have built operational lists in 19 territories as of late last year. We are going to be focusing our efforts on growing the business in key territories in much of the same way that we have expanded into new territories in the past. I know Fred has gone through this process on past calls. But in short, we look at finding strategic content partners to grow our release catalogue and thus encourage increased activity from these new recipients. It’s a little bit of a chicken and the egg of how do we get activity numbers without content and vice versa. So, we always start with making sure content is there when new users login if you compare it for the first time. This strategy also adds value to the list and higher activity rates we can achieve, the more value areas for artists and labels trying to get into the market.
We believe focusing on Mexico is the best path forward not only due to its size and slightly more sophisticated music industry compared to some other territories in the region, but also there is a connection and a bit of a crossover between the Mexican industry and the U.S. Latin market. Given the size of Mexico as well, we are confident that success here will encourage greater use in other territories as well. Kind of having the stable tent-pole user in Mexico and then expand that to other countries like Argentina and Colombia and then such like that. I also wanted to review progress we have seen in Canada. As you know, we began commercially charging in Canada in mid to late last year. And we have seen progress there. Prior to commercially charging our Canadian revenue was mainly artists within the country, exporting their releases to our other global lists. These artists and small labels were hit by many of the same hurdles that I discussed earlier, whether it would be touring, diminishing funding, the same things that any other artists in any other territory we are going into. So, these specific hurdles in that independent artists sector has contributed to the decline we saw in Canada this quarter.
However, digging deeper paints a much more positive outlook. Similarly, to how we are approaching Mexico moving forward, we focused on key partnerships with large independent labels and promotion agencies. And through these efforts, this past quarter, we saw substantial increases in both releases and revenue from some now consistent clients, such as longstanding Canadian independent labels, such as arts and crafts and flying colors as well as one of the most well-respected independent Canadian promoters company [indiscernible]. We are also having – continuing ongoing discussions with some other additional key partners. And we expect to have some more successes to talk about on future calls there as well. Speaking the future, with that, I will hand it back over to Fred to discuss the path moving forward.
Fred, I think you are on mute.
Fred Vandenberg
Thank you. Looking forward, so as I have said earlier, product development, I think is a really important way for us to accelerate revenue growth. We have talked about the growth in users, both in terms of growing customers, and then growing recipients on those. Those are really the two main drivers that we are going to be focusing our product around. We did where we are expecting to see a few press releases in the short-term on things that we are developing and starting to deliver. The first being Quick Share, and then the second is really a new product. We have talked about a little bit before and that’s radio monitoring. We have – we are working through a couple of technical challenges, contextually detections are high and then in some areas where they are – we are missing something, we are just working through a technical challenge there. But that’s moving forward. And we are just working on our business plan on how to launch that. To do all of these things, we again, we have made a change internally, that department and I expect things to be producing at a quicker cadence.
With that, I will turn it over to questions.
Question-and-Answer Session
Operator
Thanks Fred and Allan. So, yes, now we will begin our questions-and-answer session. [Operator Instructions] It looks like we do have one that was written into the Q&A chat if you guys want to touch on that one.
Fred Vandenberg
Sure. I would prefer if people actually put their hand up and ask a question verbally, it’s easier for us to keep on top of those rather than reading them, so everyone else can see the question. The first question we have received is global revenue from Universal Group grew by 8.7%. How much of that is just price increase? Well, I don’t know what that means by just price increase, the Universal’s agreement is flat global agreement that covers all of their use. We think we approach that in that way for specific reasons, but essentially covers all of their global use. And with growing use, growing platform capabilities, we negotiate increases. We agreed on 10% increase, effective April 1st, I think it was of last year. And the 8.7% is really just a revenue recognition issue. They are at – their monthly fees are 10% higher than they were last year. And that’s really a function of all the custom development that we have done, and their growing use of the platform. The second year of that agreement starts, I think April 1, 2023. The second question is about activity metrics and I assume that means within the platform. Activity metrics are which activity metrics would you disclose there is all sorts of things as we track releases and distributions, active recipients, activities by recipients. And I think if you start producing those and we look at them internally, it has to come with a narrative about explaining how they relate to revenue. And it gets overly complex I think to do that.
Operator
That might be all that we have.
Fred Vandenberg
Okay. Thanks everyone. We look forward to speaking to you next quarter.
Operator
Goodbye.
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