Destiny Media Technologies Inc. (OTCQB:DSNY) Q3 202 Results Conference Call July 12, 2022 5:00 PM ET
Company Participants
Fred Vandenberg – CEO
Allan Benedict – Director, Business Development and Marketing
Operator
Hi, everyone. Thank you for joining us today for our webinar. Before we begin, I would like to announce that we will be referring to today’s earnings release, which was sent to the newswire 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 the 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 the most comparable GAAP financial measures can be found in the earnings press release.
Also, I would like to mention that following the presentation, there will be a question-and-answer session. [Operator Instructions]
With that, I’d like to turn the call over to your host, Mr. Fred Vandenberg, Chief Executive Officer.
Fred Vandenberg
Thanks, Rebecca. Hi, everyone. Today, we have myself, Fred Vandenberg; and Allan Benedict, who leads our Business Development team and Marketing teams.
So today, we’ll take you briefly through the quarter. I’ll touch very lightly on the revenue. And Allan will give you a much broader in-depth conversation about that. And I will talk about expenditures.
Revenue was most significantly impacted by the decline in the value of the euro relative to the USD. After adjustments for FX — after adjustments for FX, revenue was up very slightly for the year, but down 2% for the quarter. While it’s a modest decline, there are a number of good things happening that Allan will shed more light on.
As you may recall, last year, we identified some very specific opportunities to add complementary technologies and services that are outside of the scope of our existing offerings, and we’re expanding our development group to pursue those opportunities, and you’ll see that reflected in our results.
You’ll see increasing costs, but you’ll also see the capitalization of some of those costs. You might also see sales and marketing costs — well, there’s a large percentage increase in cost of sales, which is a — the first line in the P&L and a corresponding decline in sales and marketing costs in our operating costs. This movement really reflects where our staff are spending their time.
As we’ve described in the past, we typically provide — we first go out and market the Play MPE platform, and then we typically provide unpaid usage before converting those customers to paying contracts. And so, what you see is a rise in our cost of sales relative to our sales as we’re sort of front-running our sales support. We were in the process of moving those customers to pilot agreements and that those costs reflect that. Also in the prior period, there were some restructuring — onetime restructuring costs.
EBITDA for the year is just slightly over $200,000 year-to-date. It’s worth mentioning this, probably mostly because of the large component of large growth in stock-based compensation that makes our net income figure drop a little bit. And we’ve also capitalized just over $300,000 for the year-to-date. So, you’ll see a slight usage of cash overall.
One last thing I will talk about on the balance sheet is accounts receivable. You’ll see a large accounts receivable. That’s a temporary thing where we — it’s mostly for Universal, and that was just recently built. It’s for longer period of time while we were negotiating our contract, which was signed in May. We don’t see any problem with that amount, but you just see a large increase, which is a little bit unusual.
With that, I will turn it over to Allan.
Allan Benedict
Thank you, Fred, and good afternoon, everyone.
Over the past few months, we’ve taken a long look into the growth of our recipient activity levels and our current pricing structure. And as our lists have grown and expanded over the years, our pricing has remained relatively the same. So, we see it as a perfect time and opportunity to update our pricing to match the greatly improved quality of our recipient list over the last handful of years.
One thing we wanted to make sure of in looking at this is that any potential pricing and change wouldn’t have any effect on the quality of content being delivered to our recipients and we’re confident that that absolutely isn’t a worry. Along with taking a look at the pricing, we’ve also taken a look kind of at a larger scale of how our lists are structured and how that reflects the current and ever-changing state of the music industry.
Our international offerings have been growing consistently over the last year, and a number of them are now at a level that we’re comfortable monetizing and charging for their use. So, we’re working on a list structure that will give labels and artists, the ability to choose by territory, genre, spoken language and a variety of others, depending on their needs for their specific release. We see this as a logical way to upsell and bring up the average amount spent on our lease as well.
Even on top of structuring the list by territory as opposed to genre, we found that some sub lists within our current offerings are strong enough to be offered on their own as standalone add-ons. We’re in the process of going through each sub list now and seeing where that’s the case. And I’ll touch on one example of that in a little while when I discuss our Latin progress.
Before getting into new and growing markets, I do want to touch on Australia. This year and this quarter specifically we’ve seen a decrease in Australian revenue. And while a large portion of that comparative deficit is due to Sony Australia, moving to an internal system and thus not renewing their agreement with us, there has been a decline in independent revenue this quarter as well. We sat down with our highest usage clients in the territory to get a better understanding of the state of the Australian indie community as we’re obviously somewhat removed from it. And they’ve let us know that it’s a trend that they’ve seen that budgets are tightening across the board with artists due to both, limited touring opportunities and some of the government grant money that many artists saw during the pandemic starting to run out. We’re very confident this is a temporary decline and in no way a loss of market share. That said, we are adjusting our current strategy to help address this and balance it out a bit more.
Australia is one of the more insular music communities around the world. They’re a very tightened industry that deals with their own and clients they’ve known more than anyone else. And up to this point, much of our independent revenues come from individual artists and large promotion firms are higher there.
When relying on individual artists, there’s naturally going to come a point where they’ll take a year or two off from releasing new content while they promote their most recent content, and that leads to some larger ebbs and flows in revenue. We’re working on ways to address this and grow our relationships with truly independent labels that will have more consistent output throughout the year, very similar to the way we’re set up right now in North America.
We’re also optimistic that as the platform adds new features and our listing activity continues its upward trend, we’ll be able to reengage both, Sony and Warner Music Australia and bring them back into the fold.
Moving to Canada, our focus in growing the Canadian market has been to build from the ground up with independent artists and labels, knowing that major labels just due to their size, will be a bit slower to move and react. Since we began monetizing the Canadian list domestically, we’ve seen distributions to Canada increased nearly 5% in just the one month we started the monetization in May.
With those increased distributions, our activity levels among Canadian recipients have grown as well. Our Canadian lists are currently among some of our healthiest and most active worldwide when looking at things like streams, downloads and release opens.
Along with this revenue from independent labels, we’ve entered into exclusive agreements with a pair of labels of that size, and we’re actively in talks with others to keep growing that base and really put together a network of independent labels that are exclusively using Play MPE within Canada.
Canadian revenue does show a decrease for the quarter, but that can be largely a trace back to 3 individual artists who had very large global campaigns originating in Canada last spring. Fiscal year-to-date revenue in Canada is still up 28%.
We’re also continuing to grow our presence in French Canada. Last August, we entered into a pilot agreement with a well-established francophone promotion company called Troupe, [ph] and their usage has more than doubled in the year since. This engagement has helped us to solidify our francophone list offering, and we’re now in a position to move them to a proper enterprise agreement. This improved francophone activity also lends itself to the list restructuring based on spoken language that I mentioned earlier.
Looking at the Latin market. This quarter, we saw our presence in the Latin market continue to grow. We commercially launched our list in 19 Latin territories and the revenue from those lists specifically accounted for just over 37% of the total Latin revenue this quarter. It’s still very early for us in the Latin space. So granted that revenue is not a huge amount by any means, but this is a great indicator of the potential we see in Latin America. Currently, this portion of revenue is included with the U.S. independents on the filings.
As new content was distributed, we saw more growth in active users, especially in Colombia and Mexico, and that growth was a 19% increase from the second quarter as we’ve been growing those lists really over the past 9 to 12 months.
In this quarter alone, 216 releases went to our Latin list, which is an increase from 184 releases last quarter. This increase is exactly what we want to see is we’re onboarding new recipients to make sure that there is constantly new content waiting for them whenever they log in to keep them engaged in the platform and keep them coming back.
One area that we focused on this quarter is in-person demonstrations. We found that the Latin music community is very hands-on and our best leads have come when we’re face-to-face demo in the product and explaining how it all works. We’re going to continue with this strategy moving forward as more and more conferences and trade shows return to action following the pandemic.
For example, we just recently attended the Latin Alternative Music Conference in New York, and ran talks to a handful of labels and promo companies to bring them over to the platform based purely off of those two days. We’re also hoping to convert some of these worthwhile leads into pilot agreements, similar to the arrangement we announced with J&N Records last quarter.
Currently, we’re selling these Latin lists as one package. You would get both Central and South America, but we see a great opportunity for growth here. As our recipient base grows and the content continues to improve, we’ll be able to split up the region and sell individual territories, which will bring the total revenue generated by our lease up. As I mentioned last quarter, there isn’t a clear cut competitor in the Latin space, and we’re very excited to fill that void in the region.
Moving to the U.S. In the U.S., our revenue from major labels continues to grow. This quarter, they’re up 13% versus same period last year. We’ve seen the biggest increase from Warner Music Group and their subsidiaries. As we mentioned in the past, and I think Fred got into it last quarter, we can grow major revenue by bringing different departments onto the platform within the promotion overall departments of these labels. And that’s how we’ve been successful, for example, with Atlantic Records over the past year.
Prior to 2021, they were using us primarily only for AAA releases, but we’ve since brought on their rhythmic and Black Music themes, and we’re going about the other majors that we work with in a very similar fashion. This past month, we also renewed Sony Music Nashville’s yearly contract and agreed to a fee increase of 10% there. They’ve been a great partner to us in the country space, and we do continue to dominate that format.
On the independent side, our revenue is essentially level compared to quarter three 2021, but we are still up over 18% compared to the same period in 2020. And as part of the list structure that I spoke about earlier, we’re looking at new ways to structure certain formats, such as Christian radio, for example, that we think will maximize growth there. Radio is constantly evolving and formats change, corporations consolidate their station offerings, and that’s always a great opportunity for our list offerings to follow suit.
And then, finally, in South Africa, we continue to build and see growth, especially with independent revenue in the region. It’s up over 26% for the quarter. And South African revenue as a whole continues to grow as well on the back of our exclusive multiyear deal with Warner Music South Africa, which went into the effect last August. It is still a very new market for us. We’re in talks with the various local rights organizations to help connect even further with the independent community there.
And with that, I will pass it back over to Fred.
Fred Vandenberg
Thanks, Allan. I guess I have to unmute myself. Before we just turn it over to Q&A, I wanted to sort of reemphasize something that Allan brought up a couple of occasions there.
We structure our list generally by country. We see some opportunity to grow revenue through upselling customers. If we simply restructure and present our lists in a different way, and we’re looking at structuring them by country of origin, which is the traditional way, and then by genre, where certain genres have a more international presence, like a jazz. Jazz is something we do right now, but the other releases can fit into that description as well. And we have country list in Australia, for example, or country list in the United States, and we can restructure it so that labels that will want to go global, we can upsell them that way. And similarly, with the recipients in certain languages like French and Latin, we’re looking at presenting the list that way as well.
With that, I will turn it over to questions.
Question-and-Answer Session
Operator
Fred Vandenberg
If there’s no questions, we can sign off. I think we probably have done a pretty thorough job of explaining the balance sheet and our revenue. So, we’ll sign off. And we’ll speak to you next quarter.
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