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Edited Transcript of SITO earnings conference call or presentation 15-May-19 8:30pm GMT

Q1 2019 SITO Mobile Ltd Earnings Call

ENCINITAS May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Sito Mobile Ltd earnings conference call or presentation Wednesday, May 15, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Terrance S. Lynn

SITO Mobile, Ltd. - CFO & Secretary

* Thomas J. Pallack

SITO Mobile, Ltd. - CEO & Director

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Conference Call Participants

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* Andy Greenberg

* Mark Nicholas Argento

Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst

* Michael Fawzy Malouf

Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team

* Rob Fink

Hayden IR, LLC - EVP and General Manager of New York Office

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Presentation

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Operator [1]

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Greetings, and welcome to the SITO Mobile First Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Rob Fink. Thank you. Sir, you may begin.

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Rob Fink, Hayden IR, LLC - EVP and General Manager of New York Office [2]

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Thank you, operator. Hosting the call today are Tom Pallack, Chief Executive Officer; and Terry Lynn, Chief Financial Officer.

Before beginning, we'd like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company's plans, objectives and expectations for future operations and are based on management's current estimates and projections, future results or trends. Actual future results may differ materially from those projected as a result of certain risk factors and uncertainties. For a discussion of such risks and uncertainties, please see risk factors as described in SITO's annual report on Form 10-K and quarterly reports on Form 10-Q that are filed with the SEC.

Before I turn the call over to management, I would like to remind everyone that a press release disclosing the company's financial results was issued today after the close. It can be accessed on SITO's website at sitomobile.com under the News and Events link that's found on the Investor Relations tab.

With all that said, I'd like to turn the call over to Tom. Tom, the call is yours.

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Thomas J. Pallack, SITO Mobile, Ltd. - CEO & Director [3]

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Thanks, Rob. First of all, I want to apologize. I'm fighting off a bug so hopefully, this is going to come through okay. In our last 10-K, we disclosed that we had a $10-plus million deal that was running in March and April. At the time of the earnings call, we were delivering on the deal and still had the execution risk on performing. So we declined to opine further on the deal until now. Aviron Pictures was our movie production partner on this initial transaction, and the After movie was goal to promote. We also proved concept with another production company for the movie Unplanned and for a time was in the top 10 rated movies.

Both of these successful movie campaigns further suggest that our vertical approach is working. It also help -- confirmation of multiple new customers confirms that our strategy is working. So I'd like to take the opportunity to now contextualize these deals against our evolving products and strategy.

The mainstay of our traditional business is simply delivering advertisements on mobile devices with tight selection criteria around location and consumer attributes. Post campaign, we deliver analytics reports that give further insights into targeted customer attributes and how we've affected them through advertising. We sell directly to brands and to marketing agencies. But we really could do more. So we incubated a program within the company to launch a new product that would allow us to deliver cross-media sales against targeted customers. This means we now have the ability to target audiences through mobile app device -- apps ads as currently we offer but also mobile device browser ads, Google, Facebook, Snapchat, TV and radio, digital billboards, PC browser ads and SEM or search engine marketing.

We are trying all this together in a proprietary way to allow our clients to better market against the media identity of their customers. Of course, we combine all of this together with our geo data to understand ROI and give more predictable outcomes.

Finally, we're not stopping there. This knowledge of customer behavior can be leveraged beyond marketing and is useful to many organizations to run other aspects of their business. We hope to, and it does not exist yet and we haven't sold it yet, solve these problems on enterprise basis by selling software as a service, also known as SaaS.

Now let me turn this over to Terry to quantify this strategic push. Terry?

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [4]

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Thank you, Tom. As a CFO, I'm going to start with the bad news. We don't have a ton of cash and our sales declined 24% from Q1 of 2018 to Q1 of 2019. These are not new trends. That said, I'm excited to begin to tell you the growth story that's been happening inside our company.

Let me dig in deeper on that. So what are we doing about cash? As mentioned in the earnings release, our plans to improve cash flow include accelerating receivables collection through improvements in the collection process, monitoring and/or reducing expenditures in noncritical areas, continuing to execute our plan to seek longer and more profitable customer agreements and seeking additional capital as needed.

Now addressing revenue. Please allow me to de-layer the fiscal year for 2018 and also Q1 of 2019 revenue along the 2 product lines that Tom mentioned earlier. First, if I look at our traditional SITO revenue, approximately $34 million or 87% of revenue landed last year. In Q1 of 2019, this was $4.9 million or 59% of revenue. Excluding certain onetime revenue deals that occurred in 2018 and correcting for seasonality, I estimate an approximate 18% secular decline in our traditional business. Some of this can be attributable to account attrition that occurred as we reorganized the sales team, as mentioned in our 10-K call. Turning to the positive, we expect to be able to stem this decline and grow this business through 2 basic business tactics: improving our product and applying more discipline to our sales management techniques.

Now for the great news. The remainder of our de-layered revenue is this new business that Tom mentioned. For 2018, this business did $5 million. For 2019, we've already recognized $12.2 million, $3.4 million of that which was done in Q1. And by the way, for those who heard me last time, this is the closest I'm going to get to earnings guidance today. We have a healthy pipeline.

Let me expound a little on Tom's commentary about this new business and tell the story about where this came from and where it's going. To begin with, our team recognized certain customer problems that weren't being solved. So we attempted to solve this with the custom approach and a minimum viable product. Necessarily, this approach was industry specific. We validated that the customer demand was real, and we delivered. In the early phases, we didn't always delight our customers and our performance was inconsistent. However, we iterated and continually improved our product. We'll continue to evolve and refine our product, but I think we're hitting our stride. The results from the 2 movies speak for themselves and the quality of our product. Now as we shift sales into high gear, I'm happy to reiterate we have a healthy pipeline.

Also, I should mention that we're not going to niche ourselves in the theatrical. We plan to apply our learning and tools as we expand into other industries.

Finally, I imagine that people are interested in the margins on this new product area. Candidly, our gross margins are lower than the traditional line of business. However, we priced ourselves aggressively to win early deals. Further, as we add bells and whistles to the product, it near 100% gross margins, this will lift the aggregate gross margins. Finally, as we move towards delivering ROI-rationalized solutions, we expect gross margins to improve even further. Now importantly, let's consider the operating expense impact of this new product. In addition to being the next-generation solution that provides more flexibility to meet client needs, this new product is significantly less expensive to run. As such, the bottom line marginal profitability, inclusive of COGS and OpEx, is expected to be better than our traditional business.

Finally to reiterate a point from earlier, since our financial results are overviewed in the press release that we issued this afternoon and are further detailed in our filed 10-Q, I'm ready to open this thing up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mike Malouf with Craig-Hallum.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [2]

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Yes. Given that you guys had $12 million, I'm just trying to get a sense of how this will work for this new business, especially on the theatrical side. So if we take a look at Unplanned and After, I think Unplanned basically has done about $18 million, and After has done about $12 million. So that's about $30 million in total. And you guys have had about $12 million (inaudible) in revenues from those 2 movies. So can you just kind of help us through that whole process as we sort of look at this new business?

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Thomas J. Pallack, SITO Mobile, Ltd. - CEO & Director [3]

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Terry, can you address that?

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [4]

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Sure. The -- obviously, these 2 movies are at different scales in terms of their cost of production relative to their aggregate margins on these things. If you look at -- in terms of like actual performance based upon our marketing spend, Unplanned actually killed it. There's no two ways about it. We are -- that we knocked out of the park. For After, we have done well. And I think the number that I saw is I think they hit $50 million in global revs on that. So looking at that -- I understand you're probably looking at the U.S. domestic, but yes, that is still a positive experience that we have. So, yes. Does that answer your question?

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [5]

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Yes. Just trying to get a sense if we take a movie that has, let's say, $30 million or $40 million at the box office or maybe you can say $50 million, how much of that is marketing? And how much of that marketing spend are they allocating to SITO?

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [6]

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That's a great question. In terms of their specific economic inside of their, I can only speak to the amount of business that we got out of it and the satisfaction that we're seeing. But yes, my understanding is they are making money. I don't have the specific breakout beyond that.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [7]

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Okay. And then just kind of explore the gross profits just a little bit more. It looks like if you take a look at the gross profit of your historical run of the base business, it looks like gross profits were just under 20%. And I'm just trying to get a sense of -- I know you've priced this, I think you said aggressively in the release that you had. Can you give us a sense of how aggressively you priced it? I know that previously in the movie business when you had a onetime business a year ago was around 20% to 25%. So should we expect that going forward? Or is this more sort of the norm?

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [8]

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Well, do you mind if I take this one, Tom?

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Thomas J. Pallack, SITO Mobile, Ltd. - CEO & Director [9]

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Yes. Go ahead.

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [10]

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Sure. So when gross margin -- there's multiple components of it, one of which is going to be some technology cost you're going to land up there that are fixed in nature. The other piece to it there's going to be variable in nature, really inventory that we're buying to fulfill various campaigns. So you have to consider that mix a little bit as we're looking at this. But secondly, if you just look in aggregate kind of the inventory cost -- and I think your question was more around this new line of business, kind of what is if I just use -- consider the revenue we're getting kind of minus the cost of the inventory. Certainly, if I use that definition for gross margin, I do think you're accurate from the beginning that it's going to be closer in the mid-20s percentage. And as I said, we priced that aggressively. That is one way that we think as we go forward we'll be able to get some -- as we don't have to price as aggressively, we'll get some lift there. The other piece to it is, this is a beginning. We have a lot of bells and whistles that we'll be adding to the product. And when those do, and we sell those into the same client, they don't really cost us much. So as a result that's near 100% gross margin additional business. So that should lift up in aggregate. The other thing that we're doing is due to the nature of what we've built here and what we continue to build it's very much around what is the ROI of specific channels and how does one optimize that and get a predictable outcome. So as we shift into those gears and we get away from one of the challenges that is in the media industry, which is how do we really get paid for performance, that's where the gross margins really unlock. However, all that said, I do want to reemphasize the point in terms of what I'll call margin on profitability, which is really all the variable cost -- revenue minus all of the variable cost, including those that hit down in OpEx. So when I consider that, I just want to emphasize that the cost -- I would just say the total cost of running that particular revenue line -- not that we have a dedicated business or anything like that, but when I go through and do back of the envelope, it's cheaper. It's actually more profitable than our existing business.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [11]

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Okay. Great. And then just one final follow-up. You mentioned in the 10-K that this particular -- basically the $10 million was from 1 movie from March 23 to April 14, and now you mentioned 2 movies. So should we expect -- should we have expected the $10 million was for one movie? And then the additional over $2 million, $2.2 million was for the other movie? And so I guess that's sort of my first question. And then there's a follow-up to that. Does that mean that these movies can vary drastically between $10 million and $2 million per movie? It's kind of a wide range.

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [12]

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Sure. So the first part of the question is generally the thing that happens with these movies is you get the first [like], and that was the one that we disclosed, which is $10 million. If it goes well, they'll often do what they call a chase campaign. And the chase campaign is really a follow-on that says, "Hey, this thing is doing pretty well on the box office, let's put some more money behind it to get more people in." And that's indicative of a success. So we had chase campaigns for both movies. So I know that doesn't give you the exact breakdown of which is which, but I think it obviously tells you that we did more than $10 million on the Aviron picture.

Secondly, your question was really around the scale of these things. So one of the things that we have found in here is that there's different kind of tier levels within the people that we can sell into. Of course, there's the -- let's just say the approximately, roughly the $1 million range of movies, and we have some expertise in those. And then the next thing about this Aviron deal is it literally was an order of magnitude larger. Now is that the end of the line? Do we stop at $10 million? Oh, no. Not at all. We plan to continue to moving upmarket here and starting to go after some of the larger budgets that are out there. And then finally, so we'll continue to service our existing tiers of clients. We also want to move upstream on that to the larger players as well. But I do want to emphasize here this doesn't mean that we're going to niche ourselves in the theatrical business. Much of the product that we have built here can be reapplied to other industries. But we importantly tailor it to the specific needs of those industries. So we are very likely going to take what we've built and then port it over and go after other industries once we're on the path here.

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Operator [13]

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Our next question comes from the line of Mark Argento with Lake Street Capital Markets.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [14]

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Just a question in terms of the product. Can you kind of maybe provide a little bit more color as to what the actual product is? And then could you talk a little bit about the balance sheet? I know you talked about you're short on cash. I know you guys put an agreement in with FastPay. I think it was in the receivables line. Just talk about if you've drawn on that at all. What are some of your options from a liquidity perspective?

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [15]

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Sure. Okay. So let's see. So for the balance sheet one, I mean it's the same stuff that we've been iterating on -- or not iterating on, we've been saying in all the stuff, I mean the standard ways that you make sure that you've got cash. Of course, we're going to do everything we can organically to hook out with working capital. We're going to try to -- and that's one of the efforts that I've done in here is try to improve my collections process to bring my day sales outstanding down. We have a lot of opportunity in there to bring down that AR balance and just running normal. So that, of course, is a -- it's a low-hanging fruit we do. We're seeing keen results from that. We'll continue to see results from that. We have the FastPay agreement, which is a factoring arrangement. We've disclosed that. We continue to pull down cash associated with that as it becomes available. No change at all on that one. And then the other ones, I'm trying to remember exactly the way that we phrased it. Candidly, I pulled that from our language on the -- the required language that we put, but it's still accurate, that we put in the Q and -- monitoring and/or reducing expenditures in critical area, and that basically means let's not waste any money and let's reduce where we can. And then, of course, we're looking to look for more profitable top line customers. We're also -- I'm always going to look for areas where I can get prepaid and I can turn the working capital situation around. That's always an emphasis. And then I've got the final one that's always in there, which is seeking new capital, additional capital as needed. And that's the standard one we put in all the stuff. If you don't mind me asking, what was your first question again?

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [16]

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Jus talking about this "product" that you guys are -- that you launched, and I'm just -- I've been following the story for a while. I'm just trying to better conceptualize what the product is. Is it basically you providing advertising and marketing services specifically to a vertical and you're productizing that? Or are you guys doing some unique and different? Just trying to get my head around that.

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [17]

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Sure. So -- and one of the things that I'm trying to do with a lot of the verbiage that we're using is just use nonjargon-laden terms. So I apologize if I'm coming across simplistically on some of this, but I just think it's important that you guys have a solid understanding of what we're doing so that -- I'm going to answer the question very straightaway as possible, but what it amounts to is we have geo data on devices. Okay? So if you take a bricks-and-mortar establishment of any sort, we can get a good sense of who's walking into the business in aggregates in an anonymous way and really help you understand your customer. And that's part of the promise that we've been working with for quite some time. Now we had traditionally only really applied that to, well, okay, how do I sell ads to you as you're looking at in-app advertisements. And that was pretty much the scope. What we realized when we were going into these various brands and agencies is they didn't want to stop there. If a person is walking into a place and they're a customer and you want to approach them, then we need the ability to hit them in a multichannel way. So what we've done on this and -- I've got some other people who can probably speak about this with more of the jargon-laden terminology, but we have the ability to tie together all of the associated ways people interact with the Internet. So as a result, think of it as a federated identity around a SITO ID. So now all of a sudden, if I want to approach the person, I can do search engine marketing toward you. I can hit you on Facebook, I can hit you on Instagram. And so the ability -- that significantly expands the inventory available to change the behavior of these customers to where they buy more stuff, visit more often, whatever kind of behavior our particular customers are trying to do. And then, of course, because we also see the change in behavior, in terms of do people walk in the restaurant, we've long used this verified walking score, but the beautiful thing here is that we can use that walking score and get a sense of attribution by channel. So now all of a sudden, I can tell you -- and this will be an example. Let's say that you're talking with somebody like me who's over the age of 40. Well, maybe I'm a Facebook person, and that's an effective channel for reaching; versus if you go after a millennial, maybe they're not on Facebook. Maybe they're on something else, a different forum. So it's the ability to capture these people in their preferred medium and advertise to them. So that's one of the things. And as all this is assembled -- and this is where I think a lot of my experience comes into play here. I began my career with Procter & Gamble, and I understand exactly how people like that think about ROI and marketing spend. So when I look at what we build here and I look at the dashboards and the data that's available, I know that this is tremendously valuable information which for bricks-and-mortar businesses in particular they don't have. And I looked at that and said, how wonderful would it have been for me to have had this information available so I can better understand my customer? And that can be applied beyond marketing in other areas. So that certainly is another way to push into these businesses and become an essential business partner to CMOs and other people in the organization. So that's an aspirational thing. I want to be crystal clear, we haven't built it in terms of a product that I can do that with, and we haven't sold it, but that's where we want to go.

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Operator [18]

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Our next question comes from the line of [Paul Sans] with [Sans Partners].

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Unidentified Analyst, [19]

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I had a few questions. First, do you have follow-up deals? Can you give us a little more color on any follow-up deals in the cinema segment?

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [20]

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I'm traditionally averse to giving out guidance. So yes -- I don't [just mean] quantification what the quarters are, but I will say this is -- we will have continuing business, and we have a healthy pipeline.

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Unidentified Analyst, [21]

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Okay. Did you get the full bonus potential? Did you realize the full bonus potential that you talked about on the $10 million deal? And if so, when will it be paid?

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Thomas J. Pallack, SITO Mobile, Ltd. - CEO & Director [22]

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Terry, you got that?

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [23]

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Yes. That is still a TBD, and we'll talk about that when we've -- when we finalize that one.

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Unidentified Analyst, [24]

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Okay. And then let me ask you a question about the product and how it's different. I know that when I go on the Internet and if I click on -- if I click on anything, I click on shoes or whatever, I find out over the next few days I'm being followed around by companies that are associated with whatever I just clicked on, right? It's almost -- sometimes I click on things just for fun to see how fast I'll be bombarded with ads. So how is that different from what you do? In other words, if somebody already knows who I am and it's showing me ads on something I clicked on, so how is what you do different?

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [25]

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Sure. So primarily what people are doing when they're seeing something like that, it's a really simple technic called retargeting. So what will happen is you'll click on an ad. They'll set a cookie or -- even if they don't set a cookie, they have something that kind of looks like a synthetic cookie. So they'll take what's called the user agent, which is going to be everything from your font type to the IP address to the machine it's running on and even the screen width. So they'll have a variety of these things because they found out that that's unique -- a relatively unique for people on same IP address. So they kind of fingerprint you based upon how you're viewing out in the browser. Regardless, think about that as a cookie. So now that you've browsed it on a cookie, wherever you go they just do simply retargeting and say, okay, whatever your are, there you go. And you might notice some time that if you browse in incognito mode you can foil their plans. The difference here is our ability to not only like -- for example, let's just say you walk in a Starbucks Coffee, and I'm Peet's Coffee, and I want to market against you. I can see that, again, in aggregate not on a personal basis, but I can see that a certain group of people walked into there, and I want to address them. So not only can I send them mobile ads there based upon frankly an off-line activity, I can now hit them wherever they live. So I can go the -- even down to the point of doing in-home smart TV advertisement. So it's much broader. There's a lot more inventory available, and it's not quite as simplistic as the retargeting you referred to.

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Unidentified Analyst, [26]

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Okay. Last question. And I'm just trying to get the nomenclature straight here. Earlier on, we talked about wanting to do big data deals, and now we're talking about a new product, and we're talking about different verticals and whatnot. And I'm not sure whether what we talked about before data deals is different from what we're doing now. Could you explain that to me?

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [27]

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Sure. So when I look back in the past, and I wasn't here. It wasn't always clear to me what those things were. So when I looked at that, I realized that there was a little bit of confusion, if you will, in terms of specifically that. So part of this call and Tom and I talked about was let's lay out what our products are and let's use kind of plain English, avoid the jargon and let's just be crystal clear with people about what we're doing. And that's really the effort behind redefining some of this. And I can speak more to that. The -- but, hopefully, we did a good job on that, and you guys kind of -- you get it. There's no mystery here. Were we effective at all on that?

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Unidentified Analyst, [28]

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Well, I -- not that -- not particularly, no. Because I'm still a little confused on -- I understand what you're saying, and I'm trying to understand how this relates to the concept of having 3 or 4 years of data on a large number of mobile devices and where they're residing and where they go to. And in the past, we've talked about that you want to be at the top of the food chain not -- the bottom of food chain certainly -- at the top of the food chain is where someone calls you up and says, "I've got an idea, and I want to run it through your data sifter to see whether it holds water." And so I'm getting a sense that we've shifted away from that and more into just using the data in a different way. That's -- so that's where I am. And maybe I'm just not sure.

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [29]

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You want to talk about that one, Tom?

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Thomas J. Pallack, SITO Mobile, Ltd. - CEO & Director [30]

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I don't think there's really -- we're using -- every one of the deals we've done in the past centered around using our data. Meaning even just basic ads, direct ads, we use our data to help supplement and appeal to target certain arenas. So it's always been involved. What we're doing now is what Terry has put together is we're being able to segregate the products better and determine how and what we're using and make it more clear. So that's one. But each one of these, there's a huge amount of data being incorporated into these movies because of being able to target the correct type of people that would want to focus in on a certain gender of the movie itself. So the After movie, which was basically focused on teenage girls, I mean it was very -- we -- that was a huge part of what we used to be able to zero in and focus in. And honestly, taking not some of the past exploits that we've been able to address and it was honestly put together, rearranged in multiple different ways with some other associated products, in fact, brilliantly by Sean Clayton who is our CSO. He's done a superb job of being able to see through the leads and to be able to draw the correct type of menu of what the customer wants and what we can deliver. And by doing that, his game plan is, is to be able to continually build this out for other niches too because using the same format it allows us to get in some other high-profile walk-in candidates like retail and healthcare and things like that. So it's ideally a lot the same, but there's definitely some secret sauce overlay front end that is -- was, as I said, brilliantly put together by Sean.

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Unidentified Analyst, [31]

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Great. What should be the next milestone that investors should look to, to see how you're doing? Besides, is there anything in between?

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Thomas J. Pallack, SITO Mobile, Ltd. - CEO & Director [32]

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I think and I can't remember which. I think Mark asked a little bit and so did you. I mean do we have anything more than this movie? I mean obviously we're -- there are constraints about doing multiple movies on one timing regards to cash. So that's one issue that we have. But we're definitely -- by performing well and especially the Unplanned movie was phenomenal, the return we got on that, we're getting great buzz outside, especially in Hollywood in regards to that. So you can -- you'll be able to see that we're going to focus in on not only that, but some larger studios now are taking notice. So it had been -- Terry, since we have been -- go ahead.

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Unidentified Analyst, [33]

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What did you guys do for Breakthrough? Because you mentioned something about Breakthrough in the beginning, but I wasn't clear what you've been part because obviously that was a, I think, extremely successful movie as well with some big -- with that one woman, a very big star. I think her name's Chrissy, I don't...

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Thomas J. Pallack, SITO Mobile, Ltd. - CEO & Director [34]

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No. I can't answer that because I'd have to look it up, what we did for it and [if] we did. Terry, do you know?

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [35]

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I don't know. No. The 2 movies I mentioned were called Unplanned and After.

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Unidentified Analyst, [36]

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Oh, I'm sorry, I misunderstood. I thought I heard you say something about Breakthrough, but never mind. All right.

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [37]

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If I did, it might have been a breakthrough in our business because we really feel like it's -- we're in a place -- yes -- so not a movie, but -- the main point here is we're in place where we're feeling really good about the product that we've developed here and we've reiterated on and its [worth]. So now we're shifting into high gear on sales. We've got a healthy pipeline. I think I would add to Tom's point in terms of what to look for next, the press releases announcing deals.

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Operator [38]

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Our next question is a follow-up from the line of Mike Malouf with Craig-Hallum.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [39]

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Can you take us through a little bit about how global this product is? Or my assumption is that all this geo data right now is just U.S.-centric, but maybe that's mistaken.

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [40]

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You want me to jump on that one, Tom, or you want to take it?

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Thomas J. Pallack, SITO Mobile, Ltd. - CEO & Director [41]

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Yes. I'll give my 2 bits real quick, but you can back me up here, my friend. Michael, our focus right now obviously was domestic, but we are -- have avenues that we are approaching to be able to expand outside that using the same tools, the same avenues to be able to collect data. All we need to do is turn it on in certain areas. We're very much focused in on Pacific region because they are geared towards a couple of our ongoing prospects. We're going to do that. And I foresee us in the future doing a movie or 2 opening in the Pacific region also.

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [42]

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I think I would add to the point and say that our limitations in -- realistically, we have to consider that if this is not a regulated environment, it will be a regulated environment. And -- so what we do is we make every effort and we do this in a clean and well-lighted way and make sure that we are compliant with non-PII. We are -- basically, our only constraint really to rolling out on a larger basis is making sure that we're compliant with regulatory structures that are there. So if we were to go abroad, we would need to find some way to solve that issue, and that would be a critical piece. We're not only planning for the days when there's less regulation on it, if you look at domestic U.S. and exclude California, we are preparing ourselves for the situation where this is a much more regulated area, and we want to be there and fully compliant in a well-lighted place. In some ways, I think we'll benefit relative to our competition because we are taking that clean approach to this. So, yes. I don't know if that answers your question but combined with Thomas' maybe it does.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [43]

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Yes. Yes. That's exactly what I was looking for. So maybe you could help me with trying to understand if someone spends $10 million to promote a movie here in the U.S. and the domestic box office is $12 million. How is that a good outcome? I guess I just don't see ROI of that especially (inaudible) -- a production budget of $14 million. So I just -- I'm having trouble understanding the payoff there.

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [44]

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Yes. Well again, that's -- I can't opine nor do I know the details of the production studios and exactly how they get to their numbers. I will say that philosophically, I mean, certainly if we're targeting mobile device ads then we know exactly we're hitting people on the domestic U.S. But if you know it, a lot of this cross-media as well is on global platforms. And this is things like Facebook, YouTube and things like that and really getting some of the marketing messaging going in those platforms. And as you know, those aren't things that necessarily can simply be contained within the 4 walls, if you will, of the United States. So we hope that we had a -- some of the larger benefits of the global deal associated with some of that. So -- but again, I'm not the production company, so I can't get into details on it. I think if -- my thoughts on this are more related to specifically am I getting paid on this? Do I feel that it's derisked? Yes, I do. Getting into the specifics of their ROI, I don't have it. Did we get a chase campaign from those guys? Yes, we did.

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Operator [45]

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Our next question comes from the line of Andy Greenberg with Saker Management.

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Andy Greenberg, [46]

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I need to focus for a second on the balance sheet and accounts receivable. So I just have a couple of questions. First, I guess, broadly, what do your payment terms look like now? And what do you want to evolve -- what do you expected it to evolve into? And how do you enforce it? And then the other question I have is, it's not clear to me how if you're operating at a, let's just say, 50% gross margin and you're doing a $10 million deal, you're laying out a whole lot of cash. So how are you going to finance these deals? And what percentage of the $10.8-ish million that was in receivables at the end of the year got paid down and is -- I guess what percent of the $8.7 million at the end of Q1 is new receivables for the quarter versus aging receivables? So I'm just not clear who you're going to finance what you have in front of you.

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [47]

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Sure. Well, there's a few metrics. I'll tell you the traditional way that I do business when I look at AR and collections. I'm a pretty simple guy, and I have done this. We don't disclose in fact that I've got my auditors look at it if I were to disclose what my actual DSO is, which is days sales outstanding, or, DDSO, which is delinquent days sales outstanding, whatever the terms are, 30, 60, whatever, whatever the kind of out terms are. So what I traditionally do when I look at this is -- it's not a fancy collection process. I literally have shared online spreadsheet invoice by invoice, and if somebody has hit over a certain threshold, perhaps 3 days DDSO, then I will hit those guys daily in a very polite and gentle way and say, "Where's my money." That in the past, in my previous experiences that are not SITO, I've been able to reduce a DDSO that literally out at 180 days, and I was able to reduce it to 60 days within a couple months and literally find millions of dollars. I've done it before. I am attempting to do that as we speak, and I have seen improvements in my DDSO. So that is an ongoing effort. I think we'll continue to see efficient operations in terms of just collections. So that's the first question. And then the other is, recall we do have that FastPay factoring agreement, and that's another way that -- to help out with these working capital issues.

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Andy Greenberg, [48]

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Okay. How does -- help me understand how if you have -- you said you have $8 million of potential revenue. That would consume I assume something along the lines of $4.5 million, $5 million of cash just to [front] that business, correct?

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Terrance S. Lynn, SITO Mobile, Ltd. - CFO & Secretary [49]

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I have to be careful here because my audited financials, which my auditors have approved, only go through 3/31. I got specific allowance for them to talk about the rev rec because I've already booked and I've already run it. I have not gotten a specific allowance to go through and opine on my specific cost of goods associated with the Q2 portion of that. So unfortunately, I hate to hide behind the auditors, but it's a public company. I have to be careful. So unfortunately, I can't give you the details there.

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Andy Greenberg, [50]

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All right. I understand what you're saying. It's also not particularly helpful, but I understand where you're coming from.

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Operator [51]

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Ladies and gentlemen, we have reached the end of our question-and-answer session. And this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.