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

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 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 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. The 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'd like to turn the call over to your host, Mr. Fred Vandenberg, Chief Executive Officer. Please go ahead, sir.

Good afternoon. Today, we have myself, I'm 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 a 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'll talk about the results of the second quarter. I'll turn it over to Allan and he'll talk about business development, and then I'll come back and talk about the strategy and looking forward. So Q1 -- Q2 results, sorry. There's a few movements here. Allan will provide a little bit more detail, but I'll talk about some of the things that have happened. Revenue is up just a little under 1% when it's 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. But if we compare to 2 years ago, we're up 12%. And that generally shows that continues the trend of growth. As kind of what I've alluded to here is that in terms of movement during the quarter, the largest single impact here is an exchange reduction. The strength of the euro fell relative to the U.S. dollar, and we see that hitting the top line. Also, as we've mentioned before on previous calls, Sony Australia is using their e-card system, at least for now. We hope to change that because that hides some of our growth. Allan will talk a little bit more about where we've seen movements there. In terms of our expenses, they're up 10.5%. We've also had a little bit of a hit here in terms of unfavorable foreign exchange, where the Canadian dollar has strengthened relative to the U.S. dollar. So that impact -- that grew our expenses by about 2%. Included in our overall expenses are onetime costs of between 5% and 6%. We've had a reduction in our rent expense. We've 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 a very 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've added -- we've adjusted staffing and added as we went, and that process continues. You'll see that the business development group has added industry professionals over the last year. I mean, Allan only joined us about this time last year. And we've 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 Plan B. I've already received some questions this morning. So it's probably a good time for me to talk about projections in 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'll 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're investing in more opportunities to expand our addressable market. We've reached a point where in our immediate future is a little bit more clear, both in the timing of revenue growth and new products that we're bringing on board. We see opportunities to leverage who we are, our existing customers to provide more services. So we're 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're confident in our ability to manage that and adapt as necessary and our ability to grow near term. With that, I'll turn it over to Allan.

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 radios engagement with our platform, and we've seen that in our metrics as well. Looking at the 5 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're 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've established ourselves both as an option in the market and a viable source for radio to get their releases. We're beginning to charge within Canada and transitioning our label and promotion clients from their trial period to a paid structure. As we're moving them over, we're hearing very positive feedback across the board with clients complementing both the ease of use through reasonable cost and the reliability of our system. Much like Play MPE's initial strategy in the U.S., we're in talks with a number of labels and promotion agencies hoping to enter into exclusive pilot agreements. And we're hoping that will happen in the coming weeks and months. This month, we've 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 mangers. The radio landscape is a lot more muddled and varies in structure from country to country, even within LATAM as a whole. Just recently, J&N Music Group is one of the largest major independent labels in the 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 1, we signed them in 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're currently in talks with multiple other major, 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've been working tirelessly to grow our recipient lists in Latin America, and we now have fully operational lists in 19 Latin countries. Our engagement with radio continues to grow as well just this quarter. So since December of last year, we've seen a 32% increase in active users on those lists, showing that as we go market to market, we are engaging radio and they're engaging back with us. We are seeing strong growth on the [ sender ] side as well. Just this past quarter, we saw 184 releases go to our Latin America list and that is compared to 25% in the second quarter of 2021 as we were just entering the Latin space. And we're seeing this usage continuing to grow from quarter-to-quarter to this fiscal year. In past quarters, we've talked about Latin music has 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've been treating it basically as one package, such as we would with the U.S. radio, Canadian radio et cetera. But as we grow usage, we're 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 results of our efforts to engage new promotion teams of these labels and within their systems and expand their usage of both new recipient lists and new genres that they rely on us for. Among major independent labels, and this is a group that includes long-standing and often historic labels such as Sub Pop, Secretly Group, Epitaph, Beggars Group, a lot of the, I guess, "indie labels". We saw 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 the U.S. leads to a bit of an ebb and flow scenario with their releases. For instance, some of these smaller labels, they may only have anywhere between 3 and 10 artists signed to their label. So they'll have one year when multiple artists have prior year leases on schedule, and then they'll have a year or two off as they're off out and cycle producing new music. Looking to 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 until now has been largely untapped. And with that, I will pass it back over to Fred for some more detail.

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 a -- an example of what we've done in the past, and this is 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 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. It 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 was 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 and it's trying to hit that chicken and egg sort of thing. But over time, we explained what it is. We convince 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 our pilot phase. The fact that we're now in the Latin market that we're providing value and that we can 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've 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're starting in the U.S. with Latin music stations in the U.S. But we're building up our list, and we've 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 this 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 6 quarters in this chart where we were in the pilot phase. It's hard for us to say exactly how long we'll be in this pilot phase for Latin. And that really might be -- that question might be answered by segment as we grow. We're seeing initial success in Colombia and Argentina and the U.S. itself, but we'll 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 2 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're spread around the world, and that initial reaction was quite positive. But they started sending through us to other territories, not within Canada initially. And then we started to grow and grow and grow, educate recipients, recipients' usage. And now we're 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'll see -- we're seeing growing use of in Canada, getting references from radio, and you'll start to see a little bit of a tip in the revenue curve within Canada. I think I'll leave that there. With -- there's a couple of housekeeping items. I'm sure that people are wondering about. The Universal agreement, we're still working through a couple of terms. I expect I'll 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'll 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.

[Operator Instructions] Go ahead, Gerry.

I think it's [ Larry. Larry ], unmute yourself.

Why have we got a new CFO?

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, the strategic direction rather than spending time on the financial management.

Didn't you have -- was there a CFO before this lady became the CFO?

Yes, Sam was our CFO for the last 2 years.

That's why I asked. That's why I asked, why have we a new CFO?

[ Larry ], I think I've answered that question. I'll leave it there. I don't want to comment any further on it. There's nothing mysterious about it just I'll be able to focus on strategic direction rather than helping out with the finances.

Go ahead, [ Lawrence ].

I think it's Gerry. Gerry?

I might have missed this. I kind of joined a little late. Any update on the Universal contract?

You missed it. We're 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.

Okay. So it's going in a positive direction, still?

Oh, yes. Yes. Universal's use is just -- it's growing so.

The growth in the Canadian market, that's all, I guess, organic. Are you -- are you -- is that the expense of, I guess, the other competitor there? Or is it just expanding market?

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. Okay. Well, okay. So let me caveat that a little bit. The initial use that we have is from Canadian labels realizing, wow, 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 of -- from Canada outside of Canada. Now we're seeing more and more Canadian use within Canada, and that would be at the expense of competitor.

Okay. Fair enough. And again, if I missed something, you'll 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?

Yes. Well, first of all, Play MPE's growth is always going to be a little bit sporadic where you have that -- I've talked about this stage where you introduce it and then you get over that hump where you'd create that network, then you enter a pilot phase. So there's always a bit of a delay where you -- 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've made within our business development group and on the platform itself. So you're really starting to see -- or you will start to see the investments over the last few years that we've made that -- and the changes we've made that will start to tip that revenue growth. As far as acquisitions go, that's one of those strategy items I'd like to focus in on. I -- there are opportunities to do that, but we'll evaluate them on a case-by-case basis.

When you say opportunities, coming inbound or you see opportunities looking out there?

Say that again?

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'll see if an opportunity arises.

Well, we're aware of who our competitors are within different markets. And it's more of a -- we've had competitors approach us to buy them. The prices are unrealistic, at least what we've had. We can do it the other way around too. We have competitors that we think maybe there's an opportunity to purchase them. So we'll evaluate it on a case-by-case basis.

Okay. And finally, obviously, you have some gains in some markets, and I know currencies affected some of the revenue growth, has there been pressures in other markets where you maybe losing business or market share?

From competitive -- from pricing, I guess?

We think are just competitive -- competitors because the revenue is kind of staying flattish and you 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 competitive pressures that's kind of in certain markets where -- which accounts for the offset there on pricing?

Yes. I mean that's a hard question to answer. Like in Australia, that's probably the biggest factor that with Sony, they've 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're fairly priced and it's just a matter of acquiring new markets. Like if you 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 system, if they're entering into the system, they don't know the whole value proposition, and that's a trick in talking to people about what they're 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'll be looking at is increasing our pricing in existing markets.

Okay. Given some of the changes that you've made to your business development team or marketing, et cetera, and some of the new product developments that -- or product additions that you have added, the web based, et cetera, do you envision in the near term and I guess that's 12 months that your growth rate will return to at least double digit? Or is that -- is those expectations too lofty?

Yes. I assume you're asking for the entire Play MPE business, whether that return to double-digit growth. I hope so. 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 -- 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. We're -- 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. The -- and we've done that. We -- Play MPE has translated into different languages in Canada. It has a CanCon feature, which is tells Canadian radio if they're playing Canadian content. We've added business development staff like Allan, for example, who are much more well-versed in how record labels work. And the -- those investments, I think, will help grow that, but it is just a matter of timing. I think it'll -- I think we'll return to double-digit growth, but it's really hard to predict when that happens.

And in saying that if it's hard to predict double-digit growth in your core business, is it in its strategy to add some other complementary businesses, maybe noncore to this in order to bring our growth rate at least a higher growth rate to kind of justify being a public company?

Well, you probably missed that as well. The...

Sorry, if I did.

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'll -- those expenses will start to present more things to talk about on these calls. So I want to leave it there, but you're absolutely right that we are looking to grow the core Play MPE business, but then add things to it.

And when you say adding things towards that's going to be through internal R&D development more or less?

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've got ideas that are -- we're developing internally. And we see the light at the end of the tunnel where we can start to use -- hire more resources to make that -- to pursue those things aggressively. I think there's a question on Canadian dollar revenue. It's not a huge percentage of our existing revenue. It's I think it's $20,000. So it's a relatively small percentage. Now we see that growing though. Yes. And I've -- I kind of addressed the other questions here. So I think if there's no more other questions, we can wrap it up. Adelleh, I guess there's no further questions.

It doesn't look like there's any more questions.

Okay. Thanks, everyone, and we'll see you next quarter.