Fred Vandenberg - CEO Sandra Boenisch - CFO

Hubert Mak - Cormark Securities

Thank you for joining us today on the call today. 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’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 this 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 will now turn the call over to your host, Fred Vandenberg, Chief Executive Officer. Please go ahead.

Thanks, Leone. I will have some initial comments and then I will introduce and turn it over to Sander who will take us through the quarterly results and then I will come back and talk about our movement forward. As this is our first full quarter since the change in management, on behalf of the Director’s and myself we wanted to address and make a few comments on what has transpired. When Jay and Hoch came on board as Board members in February last year, I was very optimistic that our operations will become aligned with maximizing the long-term value of the shares of the company and grounded in a fundamental business planning done with strong corporate governance. Both Jay and Hoch represent large share positions and my own share position is large to me anyway and I became optimistic that we would move this company towards a place where shareholders are well represented. Their first mission was to ensure that we had a team capable of developing and acting on a common goal. I often talk about people rolling in the same direction. Over the last eight months, we’ve made few staff changes, we also added our new CFO so I can concentrate on the CEO responsibilities. Sandra has worked with us in the past as a controller on two separate maternity leave replacements and prior to that was the audit manager on our audit with BDO. So, we have a lot of experience with Sandra and she knows the company quite well and could come in and really hit the ground running. We may still need to add professionals in the sales and marketing front but we are very happy with the team we have now. The second mission was to ensure that we have long-term compensation policy that is aligned with the goals of our shareholders, that is to maximize shareholder value. You may have noticed that the options that we ‘ve issued in this past year were for five years and almost all of those options including all the options to the Board were well out of the money. This is a substantial change from what has transpired in the past when options were granted slightly above market value. What that means is that Jay and Hoch and our management team can only make money on those options if the stock price more than doubles. The Directors are not taking any cash compensation nor do they plan to. Our third mission given the way we’ve operated over the last few years was to take a hard look at our overall strategy and obtain a consensus on the longer-term goal. We made a strategic decision to stop investing in the technical development of Clipstream. We did not see a clear and immediate path to our sales and technical improvement with the way we are operating. JavaScript decompressions are really interesting idea and I can see that it’s likely frustrating to the shareholders that we’ve invested so much only to stop. It is not to say that there is not value in Clipstream and that we can’t pick-up this path again. But we see a tremendous and immediate opportunity with Play MPE that simply hasn’t been pursued. We see a little bit of a threat, but a big opportunity to increase this business base, if reinvesting in the development of this business. Initially I set two clear goals for the management team. The first is to reengage with our Play MPE customers and the second is to release version 8 of Play MPE, we sometimes call that web encoder. I’ll talk more about those and how we’re moving forward a little bit later. With that, I’ll turn it over to Sandra to discuss our results.

Thank you, Fred. I will start by discussing the results operations for the first quarter. Revenue grew by 9% when compared to both the immediate preceding quarter and also compared to the same quarter in fiscal 2017. This revenue growth was primarily driven by consistent growth and independent customers in United States. This segment grew by 14% over the immediate preceding fiscal quarter or 25% over the comparable quarter in fiscal 2017. And it now represents 79% of total North American sales. The growth in U.S. independent sales is partially offset by a decline in European revenues across both independents and majors and decline in Australia sales from independents over the comparable period. We’re looking into potential causes of these declines or whether they are a result of natural fluctuations. For expenses, operating expenditure fell by 7% overall with the comparative period in the fiscal 2017, so it’s mostly a result of a 12% reduction in salaries and wages. This reduction in staffing cost was not of certain one-time staff turnover related expenditures and we expect the reduction in these costs to continue throughout the remainder of this fiscal year. The reduction in salaries and wages expense was partially offset by an increase in professional fees related to employment matters. The growth of revenues combined with the reduction expenditures resulted in net income most 233,000 for the quarter and has resulted in a strengthened balance sheet. At November 30th, we had cash of 1.8 million and working capital of 1.8 million. Thank you and now I’ll turn it back to Fred.

Thanks Sandra. Okay, now for the fun part. In some ways, the past couple of years, it’s been really about playing defense. I think now we’re getting to a point where we can start going on offense a little bit and what that means is a strategy on how to grow. We believe there are four main ways to grow Play MPE, the first three are really increasing our market share and the fourth is really about increasing them to the addressable market. The first is showing up and asking for the business, that’s engaging with our customers. Second is repeating the winning strategy in a new country or category or genre of music. The third is by adding more services to our SaaS platform in order to attract more users within an existing country or category. And the fourth is adding more services or more products and charging for them. I’ll give you an example of each. The first is really about showing up and it’s simply calling or meeting with the customer to remind them to use us. That may sound obvious, but it is effective and as much as we are a software based business, but we are also in a relationship business. We’ve begun to do this more and more effectively recently, but I think we can continue to improve. We have improved our CRM, adding staff and for those staff we’re moving to more simplified roles with clear goals and we worked on programmatically reaching out to those customers. This improvement will be a process as we are changing the way we have operated. These interactions contribute to the 25% growth in US independent label revenue that we’ve seen in the first quarter. We may need to add more staff to increase that connection, increase that touch on our clients. We have also added resellers in various territories, but we are reviewing the right mix of staff versus resellers. Those engagements are also facilitated by adding new features to our system, more clearly if nothing else, it gives them something good talk about and a reason to call. Number two, repeat a winning strategy and I think I’m going to take a step back and really talk about what our keys to success are because that’ll help describe why we’re approaching it a certain way. The key to our success is that a net worth of use, that is if there is sufficient content in the system radio goes to system, if there is sufficient use by radio labels will add content to the network. If you see there is a bit of a snowball effect or a chicken and egg issue with the system, if I can draw a parallel, think over the telephone as brilliant an invention that is, if there is only one telephone it’s of limited use or no use probably. So, the key to continue in the analogy is to make sure that there are sufficient telephones that are out there. The more people that are using that the more value there is. So, our strategy is really about getting sufficient use, generally within an ecosystem or a geographic territory and then we expand to a new one. There are a number of factors that contribute to the success of that ecosystem on both side of the transaction. For example, for recipients we have recipient players that contain a library of content, our competition in many cases does not provide that, they act more like a delivery of letter rather than a presentation of a digital library. There is also the presentation of a full package of information about the artists. On the sender side, we offer recipient lists and reporting on the recipient usage, very security features like watermarking et cetera. The number of features within our system is extensive and they contribute to a system that is appealing and useful. They create momentum within the ecosystem. So, this in turn is a bit of a feedback on that and it creates a network of use which reinforces this digital marketplace. We need to have sufficient features to continue to give the product a sufficient push that demands starts generating itself. And I think I’ve mentioned this on previous calls, but we’ve been successful in creating that marketplace in a few territories and our first area of success was certain genres of music in the United States then we’ve added Scandinavia and Australia and those are territories we continue to be successful in. Simply put, you have to approach each territory with a goal of dominating that territory because of the network of use. The stronger you are in that territory, the stronger you will become. We have a number of additional territories where we have some use but we cannot rely on that yet to create that network of use and influence further use. We can repeat this strategy in new territories for example, we have finally added recipient lists in the last couple of years in Scandinavia to leverage our major label use in those territories and introduce Scandinavian independents to our all new stream as we do in the United States. Just this past month, we’ve signed an agreement with a reseller in South Africa to see if we can expand our usage to other majors within South Africa beyond UMG. There are territories that we will attack more proactively with the release of version 8, our web in quarter, whether that’s Canada, Japan, The UK, it’s difficult for us to know which territory at this stage will have the most likely success in. But, we do have an introduction with our largest client, Universal Music and we need to use that to leverage that relationship in getting used by the second and the third major label. That is really repeat what we've done in the U.S., but repeated in the UK for example and then expand to independents. Suffice to say, there is a large room to grow. This brings me to number three. The most ubiquitous impact to our revenue growth strategy is the launch of v8. That is Mac accessibility for our centers. We estimate that 40% of our potential centers used Macs, and 40% of people at the labels using Mac they cannot used Play MPE directly. We believe that is both -- this has both hindered our ability to grow and contributed to loosing clients currently. We have known about this request through our avenue to growth for seven years, and we have not yet addressed this. This is a weakness in our business but a large opportunity as well. It's difficult for me to describe or communicate my enthusiasm and excitement about releasing this version. I've been cheering for it for seven years and now that it's about to launch, I'm extremely excited about moving forward. But this is that network of use that I keep talking about. It is hindered by the lack of Mac accessibility. If our keys to success is to dominate the use of senders and recipients like I've described above, it's not difficult to see that cutting off 40% of your network has a devastating impact. I know Rick, our Director of Product Development is really excited about going back to our customer base and showing them this product and that now meets their expectations. And I know our customers are really excited about it, specifically UMG. We could finally have sales conversations again with a large group of potential customers in the context of delivering more up-to-date piece of software. While this won't open a dam to revenue, I'm very optimistic that the changes will facilitate the longer-term growth of Play MPE. Version 8 will simply be accessible to anyone in the browser, whether it's on a PC or Mac. There will be no need for PC or Mac version. To date, we have been a SaaS provider in business model only, charging customers for usage but not really a SaaS company from a technical side. The best in SaaS models today reside in the browser. When we release Version 8 we will be a true SaaS company in every way with the ability to upgrade or add significant functionality through our software easily with only work required by the customer. After the release of Version 8, we've looked at more features both incremental improvements and perhaps even entirely new services or products that our customers need or want. I'd like to note that true SaaS models trade at a premium on public markets because of predictable revenues and low operating costs which lead to high margins. The operating leverage in SaaS is high. Healthy increases to revenue lead to much higher increases in net income and we hope to trade at a true SaaS multiple once we prove that we can grow. v8 is also has added benefits in that it's easier to use and more easily translated into additional languages. Now this brings me to number 4. This category is probably the most interesting, but it's a more longer-term view of our potential. Because it has the potential to expand our market size by a multiple. Right now, managing the label's most important asset, the song and the associated pieces of metadata is very complex. Play MPE covers a small portion of this workflow related to that asset management. The question is can we increase our share of that business? And I believe we can. If we can, it should add to our strong revenue growth. We have some ideas on how to make the digital song management process even easier and more effective for our customers and increase our value, that includes -- examples are adding reporting data, adding dedicated label webpage services or artist webpage services. What this is, is really an automatic creation of a landing page for labels that are within our system, within Play MPE. We’ve talked about integration with the label’s database, make it easier for them to actually engage in our marketplace and we’ve talked about catered players for our recipients. These are just a few examples of the things that we seem to work on technically now once V8 is launched. All of these things we’ve talked to our clients about all of which our clients have expressed an interest in and I believe we can do all of them profitably. But it will be a matter of analyzing that, confirming that and then prioritizing our next products. And these new product ideas will help grow our market share in existing territories but it will also help expand traditional aspects managing our label’s assets. Our first port [ph] of call though is really driving the nail home with our existing product, so we can both defend our current market share but also encourage more use worldwide. Our sales and product groups are extremely excited as am I about delivering this version 8 and it’s a product we can be proud of. I think I’ve noted on the last call that we’ve delivered an outflow version to Universal. The feedback we’ve got has been very positive. We are very close to releasing a beta version and we still expect to have a full version, say mid-spring. With that, I will stop talking and I will turn it over for questions.

[Operator Instructions] Your first question is from Hubert Mak from Cormark Securities. Please go ahead.

Hey, thanks. Yes, I just got in from a conference call, there seems to be a lot of put and take here. Can you sort of may be highlight for us over the next 12 months, what are the key trials here that we should be focused on or follow and track, that would help reaccelerate the revenue growth again in a 12-month timeframe?

Sorry, I didn’t make out what you said there, Hubert. The key, what?

I guess the sort of key milestones or key trials that we should be watching for over the next 12 months that would be sort of initiatives to help reaccelerate the revenue growth over the next 12 months?

Well, okay. So, I think patience is probably something that I need to ask for. Over the next six to 12 months our main priorities are delivering V8 the web in quarter. We need to renew with Universal and then we will build out a marketing plan based on the results of those actions. So, I think we still expect that we will grow independent of those things, but those will be markers for us to leverage. And I think true grow flow will be seen after we deliver version 8 and we start out a new -- new things that our marketing team -- our sales and marketing team can leverage.

And specific to Universal, I guess what the relationship right now is, is there still an extension of agreement and are they waiting for sort of an updated version of the playing field before they pull out, like is this similar to how I guess maybe a couple of years ago is sort of similar sort of Universal has roll out before independence gets adopts, is that how you think about this?

Yes, okay. A lot to unpack there. Universal is a good introduction to a market because Universal is a very influential player in that ecosystem that we present. So, if Universal uses us, radio has to use us to get to our content, that mean there is probably other ways but that’s certainly the easiest way. That begins the discussion on network of use within the territory. So, I mean for example in [North Africa] [ph] that we were just talking about them, we’ve signed a reseller to approach Sony and Warner, then potentially after that approaching the independents but we can leverage Universal’s use within that territory to expand to new customers. As far as the agreement with them, we’ve extended it for a month to January. I know we're engaged with them in discussions right now. I’m sure that they would like -- would have rather negotiated after we released the final version of V8, but the reality is that I think that they believe they’ve seen it, they’ve seen the alpha version, they know it's coming in a few months here and there is not immaterial, but it's not something that’s going to prohibit an agreement that’s signed shortly.

Okay, and then just quickly on the cost side, obviously you’re able to bring it down here and it looks like it's going off, if you guys [ph] exit it the Clipstream, but I also heard that you guys are potentially investing here on the Play MPE. So, can you just kind of talk to how we should think about the cost, how that would track in terms of where the increasing headcount or whatever it might be.

Yeah, we still expect -- without adding staff we expect our cost to decline a little bit from Q1. You don’t see the full reduction in Q1 yet. And I think it's worth noting that reduction in costs doesn’t hinder our operations. We are still in fact I think we’re probably more efficient and productive in the way we operate because we have a clear understanding that where the goals are and where we are all rolling in the right direction. But we do, we continue to see positive results when we just simply engage with our customers more, whether it’s calling them or visiting their premises around United States or even globally. Engaging our customers is very effective and I think we can easily add either resellers or staff that can operate within our territories and just increase that touch. Whether that those staff are account managers or more VP sales, we haven’t quite determined that yet, but I don’t expect if we do to do those things that it will increase our cost tremendously, it wouldn’t be a big bump from Q1 for sure.

Again, just a last one from me, you guys did put about 9% reported growth rate here. Is this something that you think is sustainable here I guess over the next this coming year here, based on everything that you guys are going to put in place?

Yes. So, we did increase by 5.5%, 5.6%, if you ignore exchange rates. So, if I am being completely fair, our growth was about 5.6 and we benefited from some fluctuations and exchange. I don’t see a reason why we can’t continue that. I hope that with, when we, when we’re further down the track and launching V8 and billing a more structured sales approach that looking back this quarter will seem unnoticeable, this growth will seem small. I believe that’s possible, I think there is, again, I would like some patience in that, but I am very optimistic in how we can grow Plan B over the longer term.

Thank you. [Operator Instructions] There are no further questions at this time. Please proceed.

Okay. Thanks everybody. Thanks for joining the call. I think my contact information is on the bottom of all of our press releases. If you have any questions please don’t hesitate to reach out. But with that, I’ll sign off. Thanks very much.

Good bye.