Revenue Increases 34% on a Pro Forma Basis SACRAMENTO, Calif., May
9 /PRNewswire-FirstCall/ -- Digital Music Group, Inc.
(NASDAQ:DMGI), a content owner and global leader in the digital
distribution of independently owned music and video catalogs, today
reported results for its first quarter ended March 31, 2007.
Revenue for the first quarter of 2007 totaled $3,392,547, compared
to $720,648 in the first quarter of 2006. The Company's net loss
for the first quarter of 2007 was $736,348, or $0.08 per share,
compared to a net loss of $413,943, or $0.07 per share, in the
first quarter of 2006. During the first quarter of 2006, Digital
Music Group completed its initial public offering and the
concurrent acquisitions of Digital Musicworks International, Inc.
(DMI) and certain assets of Rio Bravo Entertainment LLC, doing
business as Psychobaby. DMI was deemed to be the "accounting
acquiror" in these transactions. On September 8, 2006, the Company
completed the acquisition of Digital Rights Agency, LLC (DRA), a
leading worldwide digital music distributor focused on independent
record labels. Therefore, the Company's GAAP-basis results reported
herein for 2006 are the historical results of DMI for the entire
period plus the results of the acquired companies for the period
after their respective acquisition dates, while the GAAP-basis
results for 2007 are the results of all of the companies for the
entire quarter. The Company believes that presenting the 2006
results on a pro forma combined basis, which reflects the results
of all the acquired companies as if they had been combined
throughout all periods presented, is helpful in understanding the
Company's overall results. First Quarter 2007 Compared to First
Quarter 2006 * Revenue for the first quarter of 2007 of $3,392,547
represents an increase of 34% from the first quarter of 2006, when
pro forma combined revenue totaled $2,526,085. * The Company's net
loss for the first quarter of 2007 was $736,348 or $0.08 per share,
compared to a pro forma combined net loss of $442,855, or $0.06 per
share, in the first quarter of 2006. * Total paid downloads (with
albums presented as single track equivalents) for the first quarter
of 2007 were 4,782,200, or 33% greater than the first quarter of
2006 when paid downloads on a pro forma combined basis totaled
3,594,400. * On average, there were approximately 232,300 music
tracks available for sale during the first quarter of 2007,
compared to approximately 80,700 music tracks available for sale
during the first quarter of 2006. Total music tracks available for
sale were approximately 243,000 at March 31, 2007, compared to
approximately 99,700 and 219,800 at March 31, 2006 and December 31,
2006, respectively. * The average monthly download rate for the
first quarter of 2007 was 6.9 times, compared to pro forma combined
download rates of 14.8, 9.5, 7.5 and 6.4 times for the first
quarter through fourth quarters of 2006, respectively. * Apple
iTunes Store accounted for approximately 70% of the Company's
revenue for the first quarter of 2007. Commenting on the quarter,
DMGI's Chief Executive Officer, Mitchell Koulouris, noted, "Our
year-over-year revenue growth is attributable to the steady
increase in the number of tracks we have made available for sale
and our emphasis on broadening our distribution channels to include
more subscription and mobile distribution partners. In last year's
first quarter, approximately 89% of our revenue came from Apple
iTunes, less than 5% was from subscription services, and we had no
mobile distribution. With our acquisition of DRA in September 2006,
we gained immediate access to mobile channels, and revenue from
mobile distribution represented approximately 10% of our total
first quarter 2007 revenue. In addition, distribution through
subscription services grew to approximately 7% of our total first
quarter 2007 revenue. Making more music available at more places
will continue to be a key objective for DMGI throughout 2007 and
beyond." Mr. Koulouris continued, "Our first quarter 2007 results
also demonstrated steady sequential growth over the fourth quarter
of 2006. We increased the number of tracks available for sale
during the quarter by 18% from the previous quarter, and our total
revenue advanced 21% to $3.4 million, due primarily to the increase
in the number of music tracks available and an increase in the
average monthly download rate per track from 6.4 times to 6.9
times. Revenue from mobile distribution and subscription services
also contributed to the revenue growth, increasing by approximately
19% and 31%, respectively, over the fourth quarter of 2006. "We
also made good progress in content acquisition and channel
expansion during the first quarter," stated Mr. Koulouris. "We
expanded our music catalog with new digital distribution agreements
with well- known artists such as Olivia Newton John, Wayne Newton,
and Richard Clayderman, as well as independent records labels such
as EsNtion, Adelphi, and Thick Records, among others. We also
purchased the digital rights and master rights to recordings from
Todd Rundgren and Dwight Twilley. We added YouTube, Amazon Unbox,
In2Tv, BitTorrent, Helio and Movielink to our list of digital video
distribution partners, and we entered into new video distribution
agreements with illusionist Criss Angel, comedian Andrew Dice Clay,
and obtained the digital rights to video catalogs including BKN New
Media, Rehearsals.com, and children's classics Bozo the Clown and
Howdy Doody, along with other interesting video content." During
the first quarter of 2007, DMGI acquired digital rights to
approximately 16,000 additional music recordings and adjusted
downward by 10,000 the total number of music recordings under
management as a result of one content owner's inability to deliver
all tracks under contract and certain other adjustments. As a
result, at March 31, 2007, DMGI owned or had rights under digital
distribution agreements to approximately 341,000 individual music
recordings that it expects to be able to make available for sale.
Of these recordings, approximately 243,000 were available for sale
at that date, approximately 49,000 had been processed and
transmitted to one or more digital entertainment services where
they were awaiting review and processing by the services before
being posted for sale, approximately 14,000 were in various stages
of the Company's digitization process, and approximately 35,000 had
not yet been delivered by the content owners. In addition, at March
31, 2007, DMGI had more than 4,000 hours of video content under
long-term distribution agreements. Commenting on the Company's
video operations, Mr. Koulouris said, "Digital distribution of
video content is still in its infancy. Our operations team is
working diligently to digitize the substantial volume of video
content that we have acquired digital rights to, and we are working
collaboratively with our many video distribution partners to get
our content to market as soon as possible. During the first
quarter, we processed and delivered portions of our video content
to various digital service partners, where it will be available to
consumers. Because most of our distribution partners are still in
the process of launching and establishing their digital
entertainment services for video or are in the testing phase for
advertising-supported business models, the revenue we received in
the first quarter from video sales was negligible. As previously
communicated, we do not expect to achieve any meaningful revenue
from video distribution until the second half of 2007, but we
remain enthusiastic about the long-term business prospects for this
exciting, emerging market space." Karen Davis, Chief Financial
Officer, provided an update on the Company's balance sheet, "Our
financial position remains strong with DMGI's March 31, 2007
balance sheet showing $17.5 million in cash, no debt (except for
minor equipment leases), and stockholders' equity of $34.8 million.
As of that date, we were contractually obligated to pay up to
approximately $5 million for future deliveries of digital content."
Conference Call and Webcast Digital Music Group's management will
host a conference call and webcast tomorrow, May 10, 2007 at 11:00
a.m. Eastern Time, 8:00 a.m. Pacific Time. To participate in the
call, interested parties are invited to dial 866-356-3093 (for
callers in the U.S.) or 617-597-5381 (for international callers) at
least five minutes prior to the start time. The participant
passcode is 42971891. A live webcast of the call will be available
on DMGI's website at http://investor.dmgi.com/. A replay of the
call will be available one hour after the call ends through May 17,
2007 by dialing 888-286-8010 (for domestic callers) and
617-801-6888 (for international callers). The reservation code is
42769661. A replay of the webcast will also be archived on the
Company's website. Forward-Looking Statements This press release
contains statements that are considered to be forward- looking
statements within the meaning of federal securities law. These
statements contain forward-looking information relating to the
financial condition, results of operations, plans, objectives,
future performance and business of DMGI. These statements (often
using words such as "believes", "expects", "likely", "intends",
"estimates", "plans", "appear", "should" and similar words) involve
risks and uncertainties that could cause actual results to differ
materially from those projected by the Company. Included among such
statements are those relating to management's focus and objectives,
plans for making more content available through additional digital
entertainment services, the development of business models and
digital entertainments services for video distribution, getting the
Company's video content to market and the realization of meaningful
revenue in the future from sales of such content, and our financial
position and future obligations. You should not place undue
reliance on these forward-looking statements, which are based on
the Company's current views and assumptions. Actual results could
differ materially from those anticipated in such forward-looking
statements as a result of many reasons, including risks,
uncertainties and factors which include, but are not limited to: *
revenue and earnings expectations which are difficult to predict
because of the Company's limited operating history and emerging
nature of the digital media industry; * the Company's ability to
successfully integrate acquisitions, including the acquisition of
DRA; * the Company's ability to successfully identify, acquire for
a commercially reasonable valuation, and process additional
catalogs of sound and video recordings; * the Company's ability to
successfully enter into new sales channel relationships; *
competitive and economic conditions in the Company's industry; *
acceptance and adoption of the digital format by consumers and
potential changes in consumers' tastes and preferences in music and
video, and the extent to which the Company's content will appeal to
consumers; * the Company's limited operating history in the
acquisition, processing and sale of digital video recordings; * the
Company's limited ability to influence the pricing models of
digital entertainment services; * the Company's dependence on
digital entertainment services to review, process and make all of
its digital offerings available on a comprehensive and timely basis
for purchase by consumers; * the Company's dependence on Apple
iTunes Store for the majority of its revenue; * the Company may not
have proper legal title to the digital rights associated with music
recordings the Company purchases or licenses, or others may claim
to have such rights; * potentially long delays in receiving the
master recordings and videos that the Company acquires rights to; *
the Company's ability to renew multi-year agreements for digital
rights to music and video content as they expire; * music and video
piracy; * differing interpretations of and potential ambiguities in
U.S. copyright laws; * availability, terms and use of capital to
continue to grow the Company's business; and * maintaining adequate
internal operating and financial controls over the Company's
business and financial reporting. Many of the factors listed above
are beyond DMGI's control. Given these uncertainties, you should
not place undue reliance on such forward-looking statements. The
matters discussed in this press release also involve risks and
uncertainties described in DMGI's periodic reports filed with the
Securities and Exchange Commission (SEC), including its Annual
Report for 2006 on Form 10-K filed with the SEC on March 30, 2007.
Except as required by law, DMGI undertakes no obligation to update
any forward-looking statement to reflect events or circumstances
occurring after the date of this release. Use of Non-GAAP Measures
Management believes that non-GAAP revenue and net loss presented on
a pro forma combined basis included in this release are useful
measures of operating performance because they include the
operations of DMGI and the operations of DMI and the Psychobaby
catalog assets that were acquired on February 7, 2006, and the
acquisition of DRA on September 8, 2006, as if they had all been
acquired on January 1, 2006. However, these non-GAAP measures
should be considered in addition to, not as a substitute for or
superior to, revenue, net loss or other financial measures prepared
in accordance with GAAP. A reconciliation of the pro forma combined
statements of operations to the GAAP statements is included in the
attached tables of financial information. About Digital Music
Group, Inc. Founded in 2005, Digital Music Group Inc. (NASDAQ:DMGI)
is a content owner and global leader in the digital distribution of
independently owned music and video content. DMGI acquires the
digital rights to media catalogs and digitally encodes them into
multiple formats for distribution to digital entertainment services
operating over the Internet and wireless, cable and mobile
networks. Our digital entertainment service partners include: the
iTunes Store, Google Video, YouTube, AOL/In2TV, RealNetworks,
Napster, Wal- Mart Music, MusicNet, Verizon, Sprint, InfoSpace,
Moderati, Zingy, 9 Squared, and many others. For more information,
please visit http://www.dmgi.com/. Digital Music Group is a
trademark of Digital Music Group, Inc. Other names mentioned herein
are the property of their respective owners. Investor Relations
Contact Digital Music Group, Inc.: Karen Davis, Chief Financial
Officer, Telephone: (916) 239-6010 x2505. Allen & Caron Inc:
Jesse Deal, Account Manager, Telephone: (212) 691-8087, e-mail:
Press Contact Allen & Caron Inc.: Len Hall, VP Media Relations,
Telephone: (949) 474-4300, e-mail: Digital Music Group, Inc.
Unaudited Condensed Statements of Operations (including
reconciliation of reported results to pro forma combined results,
adjustments shown below) Three Months Ended March 31, 2007 2006
Digital Digital Digital Music Music Music Group, Inc. Group, Inc.
Group, Inc. Pro Forma (as reported) (as reported) Combined Revenue
$3,392,547 $720,648 $2,526,085 Cost of revenue: Royalties and
payments to content owners 2,450,838 348,526 1,869,324 Amortization
of digital rights and masters 178,517 52,035 89,870 Gross profit
763,192 320,087 566,891 Operating, general and administrative
expenses 1,725,081 950,664 1,223,995 Income (loss) from operations
(961,889) (630,577) (657,104) Interest, taxes and other expense,
net 225,541 216,634 214,249 Net income (loss) $(736,348) $(413,943)
$(442,855) Net loss per common share- basic and diluted $(0.08)
$(0.07) $(0.06) Weighted average common shares-basic and diluted(1)
9,025,497 5,918,855 7,373,299 Digital Music Group, Inc. Adjustments
to Reconcile Unaudited Condensed Statements of Operations, as
Reported to Pro Forma Combined Results Three Months Ended March 31,
2006 Digital Digital Rio Bravo Rights Music Entertain- Agency
Group, Inc. ment Pro Forma (prior to (prior to (prior to Adjust-
acquis- acquis- acquis- ments(2) ition) ition) ition) Revenue
$1,742,241 $-- $63,196 $-- Cost of revenue: Royalties and payments
to content owners 1,470,242 -- 50,556 -- Amortization of digital
rights and masters -- -- -- 37,835 Gross profit 271,999 -- 12,640
(37,835) Operating, general and administrative expenses 259,251
10,000 624 3,456 Income (loss) from operations 12,748 (10,000)
12,016 (41,291) Interest, taxes and other expense, net 2,282
(4,667) -- -- Net income (loss) $15,030 $(14,667) $12,016 $(41,291)
(1) For the quarter ended March 31, 2006, weighted average shares
outstanding on an as-reported basis, include (i) for the entire
quarter, the 2,249,941 shares attributable to DMI, the acquiror for
accounting purposes, (ii) for the period from February 7, 2006
until the end of the quarter, the 2,425,000 shares of DMGI
outstanding at our IPO date and the 25,000 shares issued in
connection with the acquisition of certain assets of Rio Bravo
Entertainment LLC, and (iii) for the period from February 7, 2006
until the end of the quarter, the 3,900,000 shares sold in our IPO.
The pro forma combined weighted average shares outstanding the for
the quarter ended March 31, 2006 also include the shares in (ii)
above plus the 420,000 shares issued on September 8, 2006 in
connection with the acquisition of Digital Rights Agency, LLC, as
if the acquisitions had occurred at the beginning of the period.
(2) Represents amortization and depreciation of the fair value of
the assets of Digital Rights Agency, LLC and Rio Bravo
Entertainment as if acquired at the beginning of the period.
Digital Music Group, Inc. Unaudited Consolidated Condensed Balance
Sheets March 31, December 31, 2007 2006 Assets Current assets: Cash
and cash equivalents $17,486,951 $20,505,674 Accounts receivable
1,651,286 1,687,492 Current portion of royalty advances 1,938,988
1,326,379 Other current assets 640,424 492,799 Total current assets
21,717,649 24,012,344 Long-term assets: Furniture and equipment,
net 952,536 803,203 Digital rights, net 3,627,629 3,033,239 Master
recordings, net 1,842,398 1,777,480 Royalty advances, less current
portion 5,839,143 4,230,403 Goodwill 4,428,845 4,429,782 Other
assets 40,782 39,289 Total assets $38,448,982 $38,325,740
Liabilities and Stockholders' Equity Current liabilities: Accounts
payable and other current liabilities $593,182 $817,118 Royalties
payable 2,966,045 1,952,342 Current portion of capital lease
obligations 44,370 50,496 Total current liabilities 3,603,597
2,819,956 Long-term liabilities 94,675 101,796 Total liabilities
3,698,272 2,921,752 Stockholders' equity: Common Stock 90,350
90,350 Additional paid-in capital 40,221,354 40,138,284 Accumulated
deficit (5,560,994) (4,824,646) Total stockholders' equity
34,750,710 35,403,988 Total liabilities and stockholders' equity
$38,448,982 $38,325,740 Digital Music Group, Inc. Unaudited
Summarized Cash Flow Information Three Months Ended March 31, 2007
2006 Net cash flows provided by (used in): Operating activities
$568,568 $(661,830) Investing activities (3,575,466) (350,641)
Financing activities (11,825) 33,259,654 Net increase (decrease) in
cash and cash equivalents (3,018,723) 32,247,183 Cash and cash
equivalents, beginning of period 20,505,674 468,490 Cash and cash
equivalents, end of period $17,486,951 $32,715,673 DATASOURCE:
Digital Music Group, Inc. CONTACT: Investors, Karen Davis, Chief
Financial Officer of Digital Music Group, Inc., +1-916-239-6010,
ext. 2505; or Jesse Deal, Account Manager, +1-212-691-8087, , or
Press, Len Hall, VP Media Relations, +1-949-474-4300, , both of
Allen & Caron Inc, for Digital Music Group, Inc. Web site:
http://www.dmgi.com/
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