Destiny Media Technologies Inc. (OTCQB:DSNY) Q2 2022 Earnings Conference Call April 13, 2022 5:00 PM ET
Company Participants
Fred Vandenberg – Chief Executive Officer
Allan Benedict – Director, Marketing and Business Development
Conference Call Participants
Gerry Wimmer – Investorfile
Operator
Thank you so much for joining us today on the call. Before we begin, I’d like to announce that we will be referring to today’s earnings release, which was sent to the newswire earlier this afternoon.
I would 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 conference call, 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.
With that, I would like to turn the call over to your host, Mr. Fred Vandenberg, Chief Executive Officer. Please go ahead, sir.
Fred Vandenberg
Good afternoon. Today we have myself. I am Fred Vandenberg, the CEO; and Allan Benedict, who leads our Business Development and Marketing team. Allan joined us a year ago and has a wealth of experience with the label promotions and marketing. He has background in both radio and promotion at record labels. Allan has earned the respect of his team and our clients, and we promoted Allan last month to take over both the Marketing and the Business Development Groups.
Today, I will talk about — we will talk about the results of the second quarter. I will turn it over to Allan and he will talk about business development. Then I will come back and talk about strategy and looking forward.
So Q1 — Q2 results, sorry, there is a few movements here. Allan will provide a little bit more detail, but I will talk about some of the things that have happened. Revenue is up just a little under 1% when its currency adjusted. Q2 is our slowest quarter with the Christmas break.
Overall revenue was down 3%. The comparative quarter was a particularly strong quarter relatively speaking. So if we compare to two years ago, we are up 12% and that generally shows that continues trend of growth.
Kind of what I have alluded to here is that in terms of movement during the quarter, the largest single impact here is an exchange, a reduction with the strength of the euro fell relative to the U.S. dollar and we see that hitting the topline.
Also, as we have mentioned before on previous calls that, Sony Australia is using their e-card system, at least for now, we hope to change that. But that’s — that hides some of our growth. Allan will talk a little bit more about where we have seen movements there.
In terms of our expenses, they are up 10.5%. We have also had a little bit of a hit here in terms of unfavorable foreign exchange where the Canadian dollar strengthened relative to the U.S. dollar. So it — that impact — that grew our expenses by about 2%. Included in our overall expenses are one-time costs of between 5% and 6%.
We have had a reduction in our rent expense. We have secured a new office. Allan and I are actually both in the office today. It will probably reduce our ongoing expenses by about 3%, but it’s also just an office much suited — better suited to our culture. It’s really nice office and we have facilities that will help us.
In terms of the increase, the primary driver of cost increase is increased staffing. We — over the course of the last few years, we have added — we have adjusted staffing and added as we went and that process continues. You will see that the Business Development Group has added industry professionals over the last year. I mean, Allan no need to adjust about this time last year.
And we have added product management, design and development staff, and we continue to do that. It’s not — we wanted to do that over the last couple of years, but that’s really to develop new products and continue to develop Play MPE.
I have already received some questions this morning. So it’s probably a good time for me to talk about projections and our stock repurchase. We continue to grow the general trend is growth and Allan will talk a little bit more both what’s happened this year — this quarter and what we see in the immediate future.
But — and I will also talk about the strategy looking forward. But we have confidence in our ability to grow and while that growth might be a little lumpy, we are investing in more opportunities to expand our addressable market.
We have reached to the point where our immediate future is a little bit more clear both in the timing of revenue growth and new products that we are bringing onboard. We have seen — we see opportunities to leverage who we are, our existing customers to provide more services. So we are not going to pursue the buyback at least in the immediate future.
We think we can grow revenue in the near-term and we might dip into the $2.4 million in cash that we have. But we are confident in our ability to manage that and adapt as necessary and our ability to grow near-term.
With that, I will turn it over to Allan.
Allan Benedict
Thank you, Fred, and good afternoon. I will start by looking into the growth in Canada. This quarter, the second quarter, we saw a 64.5% increase in revenue from Canada. This increase in revenue is largely caused by a substantial increase in both independent label and independent artist clients, a portion of whom have come to us from direct referrals from Canadian radio stations. Of course, those referrals are a great sign of radio’s engagement with our platform and we have seen that in our metrics as well.
Looking at the five largest countries Play MPE distributes to, Canada is right near the top in active user engagements, showing that radio programmers are engaging with the system, they are living within the system and it’s working for their workflow.
While our revenue has been growing in Canada, the majority of that has come from Canadian clients sending releases to other territories at the moment, and now that we have established ourselves both as an option in the market and a viable source for radio to get their releases. We are beginning to charge within Canada and transitioning our label and promotion to new clients from their trial period to a paid structure.
As we are moving them over, we are hearing very positive feedback across the Board with clients complementing both the ease-of-use, the reasonable cost and the reliability of our system. Much like Play MPE’s initial strategy in the U.S., we are in talks with a number of labels and promotion agencies hoping to enter into exclusive pilot agreements and we are hoping that will happen in the coming weeks and months. This month we have also launched a variety of new lists within Canada, including a classic pop option and a Francophone option, which will be great for our French speakers in Canada.
Moving into the Latin market, as opposed to Canada where there is an existing competitor in place. The Latin market doesn’t have a system in place right now to distribute music to their taste makers. The radio landscape is a lot more muddled and varies in structure from country-to-country even within Latin as a whole.
Just recently, J&N Music Group, is one of the largest major independent labels in Latin space, as well as a top major independent in the tropical music space, they have over 40 years of history in the market and just on March 1st, we signed them on with our first exclusive pilot agreement in Latin America. The fees for this agreement are relatively low, but I know, Fred will talk more about this stage of our growth a little bit later for the newer market.
On top of J&N, we are currently in talks with multiple other major independent and independent clients, looking to secure some additional pilot agreements to grow our exclusivity and solidify our place in the Latin market.
As you may know, we have been working tirelessly to grow our recipient lists in Latin America, and we now have fully operational list in 19 Latin countries. Our engagement with radio continues to grow as well just this quarter. So since December of last year, we have seen a 32% increase in active users on those lists showing that as we go market-to-market, we are engaging radio and they are engaging back with us.
We are seeing strong growth on the sender side as well. Just last quarter we saw 184 releases go to our Latin America list and that is compared to 25 into second quarter of 2021 as we were just entering the Latin space and we are seeing this usage continuing to grow from quarter-to-quarter too this fiscal year.
In past quarters, we have talked about Latin music as more of a homogenous thing. Latin music is actually incredibly varied with genres ranging from tropical to regional Mexican to Latin pop to reggaeton and so on. Just like the genres, the Latin market is also spread out geographically.
Up until this point, we have been treating it basically as one package such as we were with the U.S. radio, Canadian radio, et cetera. But as we grow usage, we are going to start segmenting this market into different territories and those lists will really stand up on their own.
Moving to the U.S. Revenue from U.S. major labels is up just under 8% this quarter, 7.6% to be exact. And that’s been helped along by both Warner Records and Atlantic Records, both of whom are members of the Warner Music Group. They have more than doubled their usage this fiscal year-to-date.
These increases are the result of our efforts to engage new promotion teams of these labels and within their systems and expand their usage of both new recipient list and new genres that they rely on us for.
Among major independent labels and this is a group that includes longstanding and often historic labels such as Sub Pop, Secretly Group, Epitaph, Beggars Group, a lot of the, I guess, Indie labels. We saw a revenue increase in that group of just over 10%.
In true independents, both artists and very small labels, we did see a decrease in revenue of under 2%. However, that’s in comparison to the highest revenue year among Indies that Play MPE has had in its history and it’s still very much an increase over the second quarter in 2020.
The nature of independent labels in that leads to a bit of an ebb and flow scenario with their releases. For instance, some of these smaller labels, they now only have anywhere between three and 10 artists signed to their label. So they will have one year when multiple artists have prior year releases on schedule and then they will have here two office, they are off album cycle producing new music.
Looking into South Africa as well, we saw a substantial increase in revenue in South Africa. It is up just over 500% from the second quarter of 2021. A large driver of this is the increase in revenue we saw from our multiyear exclusive agreement with Warner South Africa.
We also have ongoing conversations with Rights Organizations in South Africa, hoping to expand even further into the territory and we really do see South Africa as a door into the African market, which up till now has been largely untapped.
And with that, I will pass it back over to Fred for some more detail.
Fred Vandenberg
Thanks, Allan. Okay. So I wanted to spend a little bit more time talking about our strategy and our market growth. It’s probably a good idea to give you a little bit of an example of what we have done in the past and this sort of informs how we operate in the future.
This chart that you see in front of you is our actual results in revenue in the U.S. market. This is really limited to genres of like country and Christian and alternative music with a few others thrown in there. So this is isolated to those genres within the U.S. market.
The first stage that we had with the U.S. market was really a market introduction. We went to record labels and we talked to them. We said, this is what we have. This is what Play MPE is. It’s actually called something different at the time.
But we told them what it was and there is that first stage where it’s — you want content in the system and you want recipients to use the system in Australia, that chicken and egg sort of thing. But over time, we explained what it is, we convinced them to use it.
Once we are getting a certain usage, once we get the initial hurdle overcome, the second is our pilot phase. And the J&N agreement that we just announced is relatively small dollars, but it’s symbolic of the start of a pilot phase, the fact that we are now in the Latin market, that we are providing value and that we could start charging, and we think and hope that J&N is the first of many Latin labels to enter this phase.
The — as Allan talked about, the Latin market is, we have really in the past talked about it as this one market and it’s really not one market. It’s a relatively huge market and we are starting in the U.S., Latin music stations in the U.S., but we are building up our lists and we have really had some success in certain territories within South America and Central America.
And as we grow that market, the segments within that market will become clearer, like, the different genres of Latin music, the different territories of Latin music. And so this drawing, back to the U.S. chart here, we think we can replicate this.
Now the dollars here are just the revenue in U.S. dollars, but the Latin market is a gigantic market and we hope to capitalize on that. So we have — this is in our history with the U.S. you see probably six quarters in this chart where we were in the pilot phase.
It’s hard for us to say exactly how long we will be in this pilot phase for Latin and that really might be — that question might be answered by segment as we grow. We are seeing initial success in Colombia, in Argentina and the U.S. itself, but we will start to commercialize more and more.
So I hope that gives you an example. I can do this segment by territory and the similar thing is happening in Canada. Canada is a little bit different, because there was an entrenched competitor.
But we sort of spent the last two years introducing the market to Play MPE and it’s funny in a way, because you get customers that are peripherally aware about us when we are spread around the world and that initial reaction was quite positive.
But they have started sending through us to other territories not within Canada initially and then we started to grow and grow and grow, educating recipient usage, and now we are kind of at that pilot stage in Canada as well, even though it’s a bit less — it’s more of a blend of pilot and commercialization, it’s a little bit different.
But that really depends on — that’s dictated by the type of market it is. But we will see — we are seeing growing use within Canada. We are getting references from radio and you will start to see a little bit of a tip into revenue curve within Canada.
I think I will leave that there. With the — there’s a couple of housekeeping items, I am sure, that people are wondering about. The Universal agreement, we are still working through a couple of terms. I expect I will release an 8-K shortly. It’s just little housekeeping items.
Our new CFO was appointed today. We began this process several months ago. I think with this change, I will be able to focus more on the strategic direction of the company rather than the financial management, and I think this will be especially important as we continue to grow and expand in new addressable markets.
And with that, I will turn it over to questions.
Question-and-Answer Session
Operator
[Operator Instructions] Go ahead, Gerry.
Fred Vandenberg
I think it’s Larry [ph]. Larry got to unmute yourself.
Unidentified Analyst
Why have we got a new CFO?
Fred Vandenberg
Well, I think, I addressed that in my comments at the end. It’s — I just — I needed to be able to focus in on the financial data, sorry, in the strategic direction rather than spending time on financial management.
Unidentified Analyst
We have — was there a CFO before this lady became the CFO?
Fred Vandenberg
Yeah. Sam was our CFO for the last two years.
Unidentified Analyst
That’s why I asked, why have we a new CFO?
Fred Vandenberg
Larry, I think, I have answered that question. I will leave it there. I don’t want to comment any further on it, because there’s nothing mysterious about it. Just I will have be able to focusing on strategic direction rather than helping out with the finances.
Operator
Go ahead, Lawrence.
Gerry Wimmer
Fred?
Fred Vandenberg
I think it’s Gerry. Gerry?
Gerry Wimmer
Fred, do you hear me?
Fred Vandenberg
Yeah. Yeah.
Gerry Wimmer
Hi. Thanks. I might have missed this. I kind of joined a little late. Any update on the Universal contract?
Fred Vandenberg
You missed it.
Gerry Wimmer
There you go.
Fred Vandenberg
We are finalizing some terms and I expect to have an 8-K out shortly. I — it’s never as fast as you want it to be, but I suspect it will be out soon.
Gerry Wimmer
Okay. So it’s going in a positive direction, so?
Fred Vandenberg
Oh! Yeah.
Gerry Wimmer
Oh!
Fred Vandenberg
Yeah.
Gerry Wimmer
Great.
Fred Vandenberg
Universal’s users just it is growing, so.
Gerry Wimmer
The growth in the Canadian market, that’s all I guess organic. Are you — is that at the expense of I guess the other competitor there or is it just expanding market?
Fred Vandenberg
That would be at the expense — it might be a bit of both, but it’s primarily at the expense of the competitor, I would say.
Gerry Wimmer
Okay.
Fred Vandenberg
Okay. So let me caveat that a little bit. The initial use that we have is from Canadian labels realizing, while we can send, with Play MPE, you can send around the world, because we have managed list in several territories now.
So that initial use — the initial Canadian revenue was that peripheral use outside from Canada, outside of Canada. Now we are seeing more and more Canadian use within Canada and that’s — that would be at the expense of competitor.
Gerry Wimmer
Okay. Fair enough. And again, if I missed something, tell me, is there still in the strategy of M&A to kind of complement growth — organic growth? I mean, your organic growth is — well, it’s there, but it’s still pretty small for a public company, any comment on that?
Fred Vandenberg
Yeah. Well, first of all, Play MPE’s growth is always going to be a little bit sporadic where you have that — I have talked about this stage where you introduce it and then you get over that hump where it create that network, then you enter pilot phase. So there’s always a bit of a delay when you enter new markets.
The — I expect that to change now. You see Canada and Latin growing quite well. I also think that’s helped by the changes we have made within our Business Development Group and on the platform itself.
So you are really starting to see — you will start to see the investments over the last few years that we have made that — and the changes we have made that will start to tip that revenue growth. As far as acquisitions go, that’s one of those strategy items that I’d like to focus in on. I — there are opportunities to do that, but we will evaluate them on a case-by-case basis.
Gerry Wimmer
When you say opportunities, are they coming inbound or you see opportunities looking out there?
Fred Vandenberg
Say that again.
Gerry Wimmer
The opportunities are ones that are available or ones that you would like to approach or there has been the inflow of opportunities coming across your desk or is this something that is part of your strategy over the next 12 months or it’s something we will see if an opportunity arises?
Fred Vandenberg
Well, we are aware of who our competitors are within different markets and it’s more of a — we have had competitors approach us to buy them. The prices are unrealistic, at least what we had. We can do it the other way around too. We have competitors that we think maybe there is an opportunity to purchase them. So we will evaluate on a case-by-case basis.
Gerry Wimmer
And finally, you obviously had some gains in some markets and I know currencies affected some of the revenue growth, has there been pressures in other markets where you may be losing business or market share?
Fred Vandenberg
From competitive — from pricing you asked…
Gerry Wimmer
Pricing or just competitors, because the revenue is kind of staying flattish and your report about gains in Latin America and Canada, but the overall results, currency aside kind of stays flat give or take a couple of points. Is there…
Fred Vandenberg
Yeah. Yeah. Yeah.
Gerry Wimmer
Is there competitive pressures that’s kind of in certain markets where — which accounts for the offset there or pricing?
Fred Vandenberg
Yeah. See, I think, that’s a hard question to answer. The — like, in Australia that’s probably the biggest factor that with Sony they have got their own e-card system that essentially for Australia — Sony Australia it’s free. So it’s hard to compete with that.
It’s not a good system. It doesn’t provide list management services, which we do. So it’s not always about price, but sometimes it is. So I think we are fairly priced and it’s just a matter of acquiring new markets.
Like, if we don’t really see price pressures in existing markets with one exception really, is you always get people that if they don’t use the systems, they are entering in the system, they don’t know the whole value proposition and that’s a trick in talking to people about what they are getting for their money, but once they are educated and they see it then the pricing pressure is off. In fact, I mean, one of the things we are — we will be looking at is increasing our pricing in existing markets.
Gerry Wimmer
Okay. Given some of the changes that you have made to your business development team or marketing, et cetera and some of the new product developments or product additions that you have added, the web-based, et cetera. Do you envision in the near-term, I guess, that 12 months that your growth rate will return to at least double-digit or is that — are those expectations too lumpy?
Fred Vandenberg
I assume you are asking for the entire Play MPE business whether they are returning to double-digit growth. I hope so. It’s — I think it’s possible that we can do that. The growth I think in Latin is going to be very high at least I hope so. It’s just a matter of when that starts to occur.
It’s — I think we have — with Play MPE itself, as it exists right now. It has a great capacity to grow. It’s a bit of a niche market where our addressable market is not extraordinarily large. But we can grow that core business reasonably significantly if we invest in the right staffing and our product is suited to all the different new markets.
We — and we have done that. We — Play MPE is translated into different languages. In Canada it has a CanCon feature, which tells Canadian radio if they are playing Canadian content. We have added Business Development staff, like Allan, for example, who are much more well versed in how record labels work and those investments I think will help grow that. But it’s just a matter of timing. I think it will — I think we will return to double-digit growth, but it’s really hard to predict that when that happens.
Gerry Wimmer
And you are saying that, if it’s hard to predict double-digit growth in core business. Is it in its strategy to add some other complementary businesses maybe non-core to this in order to…
Fred Vandenberg
Yeah.
Gerry Wimmer
… bring a growth rate at a at least a higher growth rate to kind of justify being a public company?
Fred Vandenberg
Well, you have probably missed that as well. The — we…
Gerry Wimmer
Sorry if I did.
Fred Vandenberg
No. It’s all right. We — our growth in expenses really has been all about adding development and design resources whether it’s product management design or software engineering. We see additional addressable markets that we will add.
And I think as the year unfolds, we will — those expenses will start to present more things to talk about on these calls. I want to leave it there. But you are absolutely right that we are looking to grow the core Play MPE business, but then add things to it.
Gerry Wimmer
And when you say adding things to it, that’s going to be through internal R&D development, what more or less?
Fred Vandenberg
That’s right. It’s — we see tremendous opportunities to leverage our existing workflows. Our customers add new services to those customers that are complementary or ancillary to Play MPE. We have got ideas that are — we are developing internally and we see the light at the end of the tunnel where we can start use, hire more resources to make that to pursue those things aggressively.
Gerry Wimmer
Okay. Thank you, Fred. No further questions. Thank you.
Fred Vandenberg
I think there’s a question on Canadian dollar revenue. It’s a — it’s not a huge percentage of our existing revenue. It’s — I think it’s $20K. So it’s this relatively small percentage. We see that growing though.
Yeah. And I have kind of addressed the other questions here. So I think if there’s no more other questions, we can wrap it up. I think, Early [ph], I guess, there is no further questions?
Operator
It doesn’t look like there’s any more questions.
Fred Vandenberg
Okay. Thanks everyone and we will see you next quarter.
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