Destiny Media Technologies Inc. (DSNY) Earnings Call Transcript & Summary

Okay. Hello, everyone. Thank you for joining us on the webinar today. Before we begin, I would like to announce that we will be referring to today's earnings release, which was sent to Newswire earlier today. I'd also like to remind everyone that this webinar call could contain forward-looking statements about Destiny Media Technologies within the meaning of the Private Securities and 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 call, we will also 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. Also, I'd like to mention that following the presentation, there will be a question-and-answer session, during which you may submit questions by selecting the raise hand icon at the bottom of your screen. Your questions will be pulled in the order they are received at which point you will be prompted to unmute your microphone before speaking. With that, I now would like to turn the call over to your host, Fred Vandenberg, Chief Executive Officer.

Thanks, Sean. Again, today, we have myself, Fred Vandenberg, and Glenn Mattern, who leads our business development group. The...

Hi, Fred. Hi, everybody. Thanks.

The -- what we want to talk to you today about is really 2 things: the results and the growth activity. So when we presented to you at the end of November, we were talking about our long-term goals and how we think we're going to get there or the strategy we're following to get there. And so the format of these webinars, at least going forward anyway, will be just talking about what happened and then what we did to work on towards that -- towards those goals. With that, I'll turn it over to Glenn to talk about our results.

Thanks, Fred. I hope everyone has enjoyed their holiday break. I'll keep this really brief. There isn't too much to discuss since our last call in late November. I should mention that the music industry slows down considerably, almost a standstill for a few weeks over the holidays. So we're happy to see our customers back to work. In terms of Q1 revenue, we saw just under 2% growth, if you remove the negative impact of currency exchange. Our revenue growth was small during the quarter, but we have a few things of interest to review. We've had a turnover of a couple of clients in the U.K. and Australia due to budget restraints, which we're working to renew. These losses partially hide some of the advances we're making. And despite them, our growth is exceeding our client rotation. We're really starting to see the results of our investment in our business development team. Several of our new team members were our customers at some point and have a deep knowledge of music promotion, our platform and a large network of contacts. This improves our ability to connect and relate to our existing client base and expand our network of users and recipients. In Q1, we've seen a 65% increase in revenue from U.S. majors. We've seen this year-over-year Q1 increase in part due to a 2-year contract with a major U.S. label, which commenced in May of '21. Improved usage by major national clients, some major -- some larger catalog releases and improvement in engagement and usage by several major sublabels. I should also mention that while we are targeting higher revenue growth, this was, in fact, Destiny's highest revenue single quarter in 10 years since Q3 of 2011 and the second highest quarterly revenue in the company's history. It's also the highest independent label revenue in company history, which is influenced by highest indie revenue in U.S., in Canada, Australia and in Europe. We haven't had a lot of change since we last spoke to you before the holidays, but our focus over the coming months will be to continue to develop Canadian, Latin and these underserved markets in the U.S. Things are going in the right direction. At the start of the quarter, we began an exclusive 2-year agreement with Warner Records in South Africa, which really helps embed us into that market. We've had a 25% increase in releases in Canada and continued revenue growth. In Latin America, we continue to expand our lists in both U.S. and Puerto Rico, as well as operational lists in 19 additional countries such as Argentina, Bolivia, Brazil, Belize, Chile, I could go on, but much of Latin America. And as a result, we're really starting to see an increase in active recipients, which have doubled between Q1 '21 and this quarter -- this past quarter. In the underserved U.S. formats, we've discussed, such as top 40 rhythmic and urban, we continue to gain recipient traction, and we'll keep focusing on these genes to increase independent revenue record label sales. And lastly, I just wanted to comment that we're in the midst of a renewal discussion with Universal Music, which we expect will ramp up later this month. And I just want to say that these are amazing partners, and we sincerely appreciate the collaborative relationship our teams enjoy. So with that, Fred, I'll turn it back to you.

Thanks, Glenn. The -- our immediate goal is to significantly expand the market share for Play MPE. And with that, we are really investing in the platform, that's one of the most significant investments we make. We've got a team of approximately 19 software engineers, product design and product managers that have been focusing -- 19 right now, it's down a little bit over the average over the last year. But we're focused on building out certain functionality for Universal so that their distribution hubs can move over to the browser-based platform. You see on the slides here that these major components of the sending side software, the Caster side and the investments we made in 2021, calendar 2021 and mostly in fiscal 2021 relate to contacts management, release sharing and release scheduling. Release scheduling is embedded in releases. With this investment, we expect to transition the distribution hubs over to the web browser-based platform and significantly expand Universal's usage. I'd be more than happy to delve in and talk in detail about what all these different components do and the benefits that they had. But that's beyond the -- this call. But the important things to take away are that these -- the functionality of these hubs, so these portions of the platform are really plugged into Universal's global release management process. They -- and the benefits inherent in these sections are -- really provide a lot of control and a lot of time savings. They improve the accuracy and they facilitate the global marketing campaigns. If you think about it, like if you're a global label that manages hundreds of sublabels in dozens and dozens of territories and each of those sublabels has different departments, whether it's marketing or promotions and those departments are separated into different genres of music, for example, or different departments anyway, you really want to make it easy and efficient to make this whole promotions process simple, streamlined, time savings, a critical path, for example, would be making sure that recipients are accurate within the system. And the context management, until you really delve into it, until you look at what we actually do, until you are in the platform, it's a little bit challenging to describe how many cost savings or time savings there are. But if you want to update a recipient, for example, that update is across platform, and that just saves an enormous time and it's really part of the critical path of promotions. It also maintains efficiencies of not duplicating work across the globe and making sure that ISRC codes are accurate across the globe, which would directly impact royalty remittances. So there's an ongoing investment of time in our software, and that's the main focus of what we've done from that standpoint over the last year. We are recruiting for additional product and design staff, both to maintain the existing platform, but also to look at new products. But that's not -- there hasn't been a lot to say over the last 6 weeks, say, because that involves Christmas and the industry really, this year, especially, the -- all recruiting efforts stopped early December and I guess nobody is engaging with that. With that, I'll turn it over to questions.

Okay. Thanks, Fred. So we'll now begin the question-and-answer session. So should you have any questions, please raise your hand by selecting the hand icon at the bottom of your screen and your questions will be pulled in the order they are received. At which point you will be prompted to unmute your microphone before speaking. Your camera will remain off and once unmuted, you can ask your question. If you raise your hand, please ensure you have access to a microphone. And should you wish to retract a question, you can select the hand icon again to lower your hand. So your first question today is from Gerry Wimmer.

Can you give me a little better clarity on the customer turnover mentioned? Obviously, revenues have been flat for, I guess, 3 quarters now during Q3, Q4 to Q1, I mean it's been about 4% in total. So it's hard to get a sense of what -- what's growing and what is -- what you're losing on because the net effect is pretty much even. Can you give me some color on that, please?

Sure. We did have some customer turnover with Sony in Australia. That probably hit all of those quarters that you mentioned. So that's hitting the growth a little bit. There is a little bit of hit from FX. And also, I think we had really high independent growth last year, so the comparison is a little tough. But we're still working towards growing out the Latin platform, the Latin segment. And when I say Latin, it's a big word. Latin is -- covers an entire continent pretty much, and also goes into the United States, Central America and clearly, Spain in Europe. So we're moving towards that -- moving towards those growth in those sections.

Fred, would you say that you would anticipate quarter-to-quarter growth from this point forward?

I mean we're always targeting growth. I -- the...

Because you have an easy comparable next quarter.

Well, it's -- Q2 is always -- is our slowest seasonal quarter, right? So...

Comparable is easy.

Okay. I don't remember, Gerry, you got me there, but -- the growth, I think, we're always targeting growth. I think we will continue to grow. I wouldn't necessarily look at 1 month or 1 quarter and worry about that. I think we're making all of the right moves to position ourselves for long-term sustainable growth at a faster rate than we've -- when we see is -- when we -- I talked at it last quarter about where we want to go in 5 years. That wasn't necessarily to suggest that it's going to be a straight line to that. There might be some delays. What we saw in the past is if you go back in our history, and we're kind of following the same cookie-cutter pattern. But if you go back in our history, we had to give away the platform and build up that network of use. And build up content, then you get recipient activities. And when you reach a certain threshold, the point where you really commercialize that segment begins. And so what you see is this period of time where you're working hard, you have new business development people, your KPIs are increasing and all of a sudden then the revenue comes in. And that's -- it's not a -- it's kind of unique in that sense. The market is not like you're selling toothpaste. You don't make revenue in the first to both toothpaste goes out, you wait a little bit.

Okay. Are you satisfied? I mean your sales and marketing expenses have gone up last year by 40%. I think also 40% comparable to Q1 of last year. Are you -- with the increased marketing -- sales and marketing, are you seeing the dividends from that investment? Obviously, on the revenue side, and these things don't happen immediately, but are you satisfied that you're getting a proper leverage off your increased sales and marketing or the sales and marketing plan you have in place?

Yes. I -- yes, is the short answer. It doesn't -- it's not like switching on a light, right? You build out a market, you build out that network of use. So it does take time where you don't have a return right away. But what you see, for example, in the United States, you see independent record sales going up on average about 9% over the last dozen years. And that's what -- once you toggle over into that commercial stage, that's what we'll hope to see in all these new segments. It just takes some time. It takes some patience. And the -- over the last history, I don't want to rehash the entire last 5 years, but we had to make some improvements to the platform. Then improve our business development, and we established a marketing department. That marketing department really is learning about what advertisements? Where? And there's just an absolute ton of choice. But absolutely, they're learning about what is effective, what generates good quality leads, what support activities. They're really there to support our business development group and whether it's explaining what we do and why you should buy Play MPE or even brand awareness in new markets, those things are planned out, and we're learning about what's -- what works and what doesn't.

So you're confident that this increase in sales and marketing expenditures based on the plan you have today will lead to increased revenue growth? You're on that path, or you see the visibility of those efforts and increase in spend?

Absolutely.

Fair enough. On the Universal contract, and I don't know how much you can say or not say, so you'll tell me what you can say. First of all, what percentage of the current sales is attributed to that contract? And if the contract is renewed, do you envision an uptick in revenues from the renewed contract? I don't know what the pricing policies of the new contract or the magnitude of the contract. Can you give me a little color on that?

Yes, sure. I'm a little bit -- I don't want to talk too much about ongoing negotiations. We're -- we extended for a month. The Universal -- first of all, I'm also not going to talk about specific details of a particular label, whether it's Universal or the smallest label, but I will talk about the platform and how it impacts that -- how we approach this. Universal is currently 37% of our revenue. We invest in a great deal in the platform. And when we do that, we have to satisfy a wide range of users. So within Universal, you really look at the distribution centers and all the control, the time savings, features that they want. You look at the distributed centers around the world. There's a whole slew of different things that those different territories need, whether it's different languages or this creating content rules or whether it's local integrations like Mediabase or Billboard, BDS in the United States. So there's all sorts of things that the distributed people need. And then probably, most importantly, and this can be lost in the shuffle sometimes is the recipient side of things. So we maintain players on browsers and mobile apps and different languages. And that -- there's a huge investment that we make that maybe the customers don't see directly because they don't see that side of the software. They do because they are on the player side as well, but when you look at it at the sending side, that satisfaction is an indirect view. You don't see it until the numbers are better or worse. So we have to maintain this platform. And so I think the trick that we have, whether it's Universal or anybody, is connecting and explaining the value that we bring to what the customer needs and is willing to pay for. So I think Universal does a really intelligent -- has a really intelligent approach to how they manage their global marketing and promotions functions. They -- the savings that they get, the efficiencies, the control that they get through the Play MPE platform. And hopefully, you see how happy I am with the platform, but it is, I think, a really intelligent way of approaching it. It's not something I think that other labels have -- I have to be careful how I say this, but they don't benefit from that strategy as well as Universal does. And -- so it's really, I mean, I guess it's us trying to explain even to Universal all the benefits that they receive from us. And as far as how it impacts our revenue going forward, I can't comment on that on how it does or we're still right in the midst of negotiations. What I can tell you is that we provide an enormous amount of benefits to them. And we are working hand-in-hand with what they want.

Would the scope of a contract be larger than what you renewed previously? Or would it be the same? Or you can't say?

It depends what you mean by scope. Are you talking dollar revenue?

Or different services that you provide. More services that you'll be providing them? Less services?

Well, again, that sort of gets into the details of a contract negotiation. I don't know. We have to -- like I said earlier, we have to connect the value that we bring to the revenue that we get. If one doesn't support the other, then there's something that has to change. So it's -- that's not something I want to really get into any more.

Understood. And finally, my last question quickly, the buyback, I don't think was renewed. Maybe I missed it, but can you comment on that?

Yes, the buyback -- well, actually -- it's still actually in place. It's still in place until tomorrow. We're talking about it. I don't have anything further on that yet at this stage.

Okay. Those are my questions.

Okay. I actually -- I received some questions this morning. And I think Gerry kind of tipped me off on it. But there's some questions that maybe I should address right now in case they don't get asked. One was about the office lease and why do we terminate it earlier? I don't know if some people may not have seen that. But our office lease was scheduled to terminate in June. We were asked to terminate early, and we kind of jumped at the chance to do that. The -- there's probably a couple of reasons why we did that. But we have a AAA office space in a bank in the center of Vancouver. If you see when Glenn speaks, you can sort of get a sense of where we are. I'm off-site right now because I'm quarantining because I actually had COVID, but it's not an office that suits our culture at all. So our desire to terminate early was to -- well, first of all, the office is expensive. It's more expensive than we need, but that's not really the primary reason. It's just not a space that helps us with recruiting. It is the opposite of cool, and we're a tech company in the music industry. And when we appeal to potential recruits, we hype that. We want to be a place where people want to show up and the office space didn't jive with that. So there's really a couple of reasons. I do want to save a little bit of money, but that's really not the main reason. It's more just it doesn't fit our culture at all. The second question that I received was about the stock options. If you saw that in a couple of months ago, a few months ago, we announced some stock option grants, and we're getting the stock option approved in the AGM in next month. The purpose of that is really staff retention, staff recruitment, those are the sort of the main reasons. I mean we've largely avoided the great resignation that you're seeing or hearing about, which is especially hitting the tech sector. The -- especially when it comes to software developers, we're hitting some pressures on salaries, especially in Vancouver. And we've really addressed that impact by being a little bit smarter about how we use developers. We've probably mixed our components a little bit differently and making sure that any time a developer is working on development activities that we make the greatest efficient use of that person. So we've hired more product designers to just make sure there's no wasted time. So there's a little bit of a mixture there, but the stock options is really just a fact of life to address rising pressures on costs and help us to attract new software engineers. The last question that I had is really about KPIs. A lot of people asked different questions and they're all very interesting questions. They center around distributions activities within the platform. On the sending side, you get distributions, sends and releases, and they're really just the measures of how many songs go to how many people or how many releases there are. And then on the recipient side, you get activities of downloads and streams and interactions with the platform. The questions I think really are centered around -- there's a few different questions on them. But basically, it's when do those activities result in revenue? Or how those -- are those activities related to revenue? And the answer is a little bit intricate, but it's really the -- when you establish a new market, you will see a rise in distributions and sends and releases. And then as that market becomes a network of use, you'll see rises in downloads and streams and the other activities within the platform. So really, the first comes first and second comes second, and then once you reach a certain threshold that those amounts become commercial to -- result in commercial agreements. When that is, is clearly a very contextual question. What you saw, for example, in South Africa. South Africa is a tiny market, but it's a nice little market to look at. We had Universal's usage for a long time. I don't remember the year when it started, but then Warner started on trials. And then last year, we started selling to independents. That growth is a little small at this point. But then now we've signed an agreement with Warner South Africa. A tiny market, but it's a nice little picture of what our strategy. Latin is obviously a huge market, and it's not one thing, so there's Latin in the United States, and we're a little bit further down the track in terms of getting distributions and activities on the recipient side, but you'll see little pockets of success within Latin like Argentina or Chile and Spain, where we have activities on both sides of the platform. When do those activities result in revenue is a bit of a -- is a negotiation, so we're working our way through that. And I hope to see some revenue from Latin this year. If you look back in what we did in the U.S. when we started, it was more what we call pilot agreements, but there are nominal agreements that just sort of established a little bit of revenue to help mitigate costs and then you really start to see the value break it out after that. Anyway, that's the -- sorry, the questions that I received this morning. I don't know if there's any other questions.

No. No more questions currently at this time. There -- Just -- we just had 1 more question submitted from Spencer Tom. So you can go ahead and unmute your microphone.

I was wondering whether you could talk a little bit about what you're targeting as successful outcomes from your current UMG negotiations? I realize that's kind of broad, but you're clearly looking for some kind of a change in or kind of an evolution in the contractual relationship. So comments on either side or either part of that question would be helpful, I think.

That's a -- I mean it's an interesting question. I've touched on it with Gerry's question. What's a successful -- I think if I connect the value that we bring, the costs that we incur, and we successfully communicate that -- how that results in a -- how that impacts the contract is a different question. There's lots of balls in the air. I would say I would really prefer to keep that contract as simple as possible for a lot of different reasons. I think one of the things that Universal did that was really smart was centralized that agreement. And so you didn't worry about -- the head office didn't worry about recovering the cost of activity within the platform to a particular territory because a distribution in Indonesia and if it's a new market isn't the same as a distribution in the United States. So figuring out that is a different thing. And then also you get a ton of activities or investments that are not really related to activities, distributions. So they'll benefit -- all these different territories would benefit, say, for example, with a release that's replicated that saves Chile. Chile uploads the same release than they -- all the metadata, the song, the cover art, artist information, whatever it is, is all right there. And the certain integrations that we've had that make it easier to even establish that release in the first place. I don't want to get too specific on how they do things, but the platform provides real strong efficiencies that are -- they save staff time that just don't -- that don't translate into activity. So I guess a successful agreement would just be something where we've successfully communicated the value and capture that value and got a return on what we invest. How that works is we'll see, I guess.

There is one other question. These contract negotiations historically have varied in length. So do you have any feeling for whether you folks are close? Or whether this might -- this is one that may drag out a little bit? I realize it's hard to predict, but the question because we've had some that got way out there. And I think that's really what I'm asking about. So if you think your folks are getting closer, it's really just kind of -- I'm just trying to get a feel for that.

Yes. I mean...

If that's reasonable.

Yes. No, I understand. The -- I guess the length of the contract really is there's a trade-off, right? The longer it goes, the -- I think the lower the fee that we could negotiate or they can negotiate. The shorter, we have to get a higher fee. So it's these kinds of things are trade-offs. But we've had a long standing relationship with Universal. And I mean, we started working with them, I think in 2002, that predates me. And I think for the most part, it's a very -- we kind of look at them as more of a partner. We want them to pay more. They don't want to pay as much like the sort of natural customer client relationships. But I think our interests are, aside from that, really 100% aligned. Like even if it's work that we do for another client, for example, they benefit, Universal benefits if there's activity in the platform. So if we benefit another client, Universal benefits from that sort of network of use. If we benefit -- if we do something that makes it easier, so like passwordless log-in, so passwordless authentications with our end users, that makes it easier for a user to look at the platform, look at the content. It makes the value that Universal sees higher because they're getting greater activities. Sorry, I'm probably going off on a tangent there, but the length of the contract is really -- I kind of look at our relationship with Universal as a long-term one that we're more of a partner than anything. And I just -- I'd rather lock it in, so we don't even have to talk about it, but I don't know where it will land.

Perhaps it wasn't -- I didn't realize that might've -- I might have kind of misinterpreted or kind of misstated the question. In terms of the current negotiation process, do you think your folks are starting to get pretty close now? Or is -- or because that's the process that...

Oh, I see. Sorry. I thought you meant -- yes, sorry. I don't know. It will depend a little bit on how well we can communicate the value that we bring, and it's a matter of -- our target is the end of January. I'm hopeful that we'll resolve it by then. But I think we're more keen to get the right agreement than speed.

Sure. But this sounds like sooner rather than later, am I correct about that?

Sure. There's a keenness to put it behind us so we can concentrate on moving them over to the browser-based platform, web-based platform, whatever you would call it, and expanding their usage. We're really -- I think sometimes we tend to focus too much on the solutions and then -- and forget about marketing ourselves to them. So we're trying to get that behind us as quickly as possible. Thanks, Spencer. I probably went off on a tangent that hopefully was useful, but I sometimes can be walk down the path. I think, Sean, is that probably -- that's probably it, right?

Yes, it doesn't look like there's any more questions submitted at this time.

All right. Let's wrap it up. I kind of wanted this to be a little bit faster than that because it's the time of the year. But anyway, thanks for joining the call, and we'll speak to you in a few months.