How is this for a conference call?
First question from Ashish Thadhani of Brean Murray & Company, second from Steve Lowengart of Bluestone Capital, third from Keith Gay of Thomas Weisel Partners, fourth from Sam Brill of JDS Capital and fifth from Cliff Condrey of Brean Murray & Company. Reminds me of the CYBER-CARE conference call?
ttrtech.com
MT: Thank you, Emanuel. This concludes our formal discussion of the quarter. Now we would like to open it up to questions.
Questions and Answers OP: Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the "1" followed by the "4" on your telephone. You will hear a three-tone prompt acknowledging your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the "1" followed by the "3". If you are on a speaker-phone, please pick up your handset before entering your request. One moment, please, for your first question.
Your first question is from Ashish Thadhani of Brean Murray & Company. Please proceed with your question.
AT: Gentlemen, could you just take us through the status of the field trial in the U.S. and also walk us through the anticipated timeline of events through commercial launch, which you said you expect early next year? What do you need to do to attain that launch on time?
MT: Yes, thank you, Ashish. Regarding the tests that have been conducted in the U.K. and the test which has now been completed in the United States,. the preliminary results are encouraging and actually match what we saw in England.
Regarding the second part of your question, regarding the timing and the timeline and getting into more specifics about that, what I can tell you is as follows. We have a fast timeline and a slow timeline. The fast timeline is that we're shooting for the first half of the new year. The slow timeline is that we expect in any case to have a major contract at some point during the year. I just want to point out that we're very confident in the technology and we're very confident in our partner, Macrovision. The results of the tests actually bear this confidence out.
AT: Thank you very much.
OP: Ladies and gentlemen, as a reminder, for any further questions, please press the "1" followed by the "4" at this time. [pause] Your next question is from Steve Lowengart of Bluestone Capital. Please proceed with your question.
SL: Hi, good morning, gentlemen. This is very interesting, Could you talk a little bit about the potential of DVD? The resemblance it currently has to your present technology in MusicGuard and how quickly that might also be ramped up? I'd also like to ask a second question. How fast will ComSign become a revenue generator? .
EK: Steve, with regard to your first question about DVD, as Marc briefly mentioned in his presentation, the DVD market is a huge market and growing exponentially every month. The growth expected in the DVD market is to continue in the three-digit figures. For example, DVD video player sales have grown year-to-date by over 120%. As Marc mentioned, now we're seeing the appearance of DVD copiers in the marketplace, which makes DVD to DVD piracy a major issue.
Our project, which we commenced approximately one year ago, is going exactly according to schedule. We have announced, as you know, development of our prototype. We expect within the next six to nine months to complete the development of this product.
SL: That was the thrust of my question, that the development and commercialization of this product would happen a lot faster than the MusicGuard commercialization.
EK: Yes, the product is a leverage of a lot of the technology of our previous products DiscGuard for CD-ROM piracy and MusicGuard for CD piracy. So the development effort will be quicker than the other projects, which we have done until now.
With regard to VeriSign, which I believe was your second question, VeriSign or ComSign, our 50% subsidiary in Israel, is already starting to have revenues. These are growing quickly. We, as Marc mentioned, are looking for the big contracts. Due to the nature of the customers, which are mainly financial institutions and government authorities, the sales cycle is a little bit long. But we are confident that the next year we should see a nice revenue stream from ComSign.
SL: Okay. And is their cost structure similarly as low as yours in TTR?
EK: Yes, presently it's very, very low. We expect there will be a maximum of around five employees. The major costs will be those involved with salaries and securing the premises and the computers of the ComSign operation.
SL: Thanks a lot.
EK: Thank you.
OP: Your next question is from Keith Gay of Thomas Weisel Partners. Please proceed with your question.
KG: Good morning. Regarding the U.S. study, can you talk a little bit when you say that the results were encouraging, along what lines? Is it the issue of playability and the issue of effectiveness, is that primarily what's being evaluated?
MT: Yes. Actually, we did in-house extensive and exhaustive tests regarding effectiveness. I'll expand a little bit on what we're talking about for the benefit of the listeners.
There are two issues. There is the issue of the effectiveness of our technology, which means how well do we protect against illegal copying. The second issue, which is arguably at least as important as the first issue, if not more important, is that the protected disc will play the same way as a non-protected disc will play. The test in the United States as well as the testing in the U.K. concentrated on the second issue of playability. This is because we are able to test more exhaustively, more comprehensively the issue of effectiveness in our laboratories and also in Macrovision's laboratories than we could out in the field.
Regarding playability, when I say that the results were encouraging, what I'm talking about is that the protected disc will work on a variety of playback devices - on your Discman, your house stereo, your car stereo, your PC, and so on.
KG: Okay. And can you comment on what the playability level was or how you measure that?
MT: I'd like to be able to comment on that, but all the results haven't come in yet. The full analysis hasn't been done. I think it would be a little premature.
KG: Okay. Also, could you comment, , with Bertelsmann-Napster apparently reaching some sort of agreement and Bertelsmann giving Napster $50 million to go out and try to develop a peer-to-peer music marketplace in conjunction with the music industry. What does that mean to TTR and what are TTR and Macrovision doing? Do you see the music industry moving more rapidly into the peer-to-peer market or do you see them slow to move and thus it still provides a good opportunity in the CD-ROM marketplace?
MT: Firstly, it's very encouraging for us because it means that BMG, which is one of the five major labels, is concerned about piracy. That's why they made a deal with Napster, which is good for us.
Secondly, I guess to paraphrase what you're asking, what effect will this have on CD sales? If we look at CD sales over the past two years, when illegal downloading of music has become rampant what we see is not a decrease in CD sales, but actually an increase. CD sales are at an all-time high.
All indications in the music industry are that CDs are not going away. So, we're looking to a number of good years of CD sales, being replaced eventually by DVD.
KG: Okay. Thanks.
MT: You're welcome.
OP: Your last question is from Sam Brill of JDS Capital. Please proceed with your question.
SB: Good morning, gentlemen. I actually have a couple of questions. First, I would like to get a sense of the timing ,once you have a contract signed for CD copy protection, what's the timing for the manufacturing process? and once you sign the deal, how soon can we expect those CDs to be in the marketplace? What needs to be done in order to get the factories up to date with your solution in it? I have a couple of questions after that, so why don't you go ahead.
MT: Okay. Thanks, Sam. Regarding upgrading the manufacturing facilities or the mastering facilities, it's actually a very simple and straightforward process. The good thing is that the mastering facilities are already familiar with the process because many of them, if not most of them, are already set up to protect CD-ROMs against software piracy because of Macrovision's SafeDisc product. The process for upgrading those mastering machines for SafeAudio for music is the same.
What it involves is sending an engineer down to the mastering facility. It's a half a day, and they're set, that's it. So this actually is one of the beauties of this technology. One of the reasons why it's so attractive to the mastering and replication facilities is because of the ease with which it's able to be installed. There is very little disruption to the regular cycle of producing a disc.
SB: Okay. So it could just be put right into the machine What exactly is it?
MT: It's actually a circuit board which is put into a slot in the mastering machine.
SB: Okay. So it would take roughly, like what a month if that to get CDs into marketplace once you sign the deal?
MT: I would say even less.
SB: Okay. And then on the DVD copy protection side, I was wondering if you could maybe clarify exactly what it is. Are you talking about DVD movies or DVD audio? Would it make sense to choose Macrovision to market your DVD technology? Do you compete with Macrovision in DVD because I know they have a DVD copy protection solution? How does your technology differ from what their doing?
EK: What we are doing is preventing DVD to DVD piracy. In other words, DVD burning, similar to CD burning, which is done by DVD burners.These are now just starting to appear in the marketplace and most likely will become much more popular as the DVD market expands. What Macrovision has ,as far as I understand, is a product which inhibits DVD to VHS piracy. So that's a different product.
SB: Actually just to sort of follow-up to what you were saying, they're working with a company called Digimarc in the DVD to DVD copy protection area, the Millennium Group. It's very interesting because they're actually sort of in a deadlock on which solution they're going to use. I think there's one group with like Sony and Phillips and there's another group with Macrovision and Digimarc. Could your solution possibly solve this whole issue over patents and how this is all going to be done?
EK: I think our solution does solve this whole problem and can solve very easily and elegantly the problem of DVD piracy. With regards to partners in the future, I think it's premature to answer that question.
SB: Great. And actually one last question, just on ComSign. Could you possibly tell us was there any revenue this quarter that was from ComSign? ?
EK: We're talking about the third quarter. In the third quarter, we did not recognize any revenue from our ComSign subsidiary.
SB: Okay. So when do you plan on seeing like the Bank Leumi, you said, you signed up for ComSign. When you do you plan on seeing the revenue from that deal?
EK: We should see revenue in the fourth quarter. It's a one line item, so the revenue and expenses will be together. But we will see revenue this quarter from ComSign.
SB: Great. Thank you very much, gentlemen.
EK: Thank you.
OP: I do apologize, sir. You have one final question from Cliff Condrey of Brean Murray & Company. Please proceed with your question.
CC: Hi, good afternoon to you, gentlemen. I had one quick question following up some of the items that Steve raised. Reading an article in Business Week this morning. I see a line that says any attempt to produce MP3 files from protected CDs also fails. Could you elaborate on how your technology might prevent CD to mp3 copying?
MT: Yes, Cliff, our technology prevents the ripping, what's called in the jargon, to rip tracks off a CD. It doesn't matter whether you're trying to put that music on a CD-R or you're just trying to make an MP3 file out of it, our technology is the same and the effect is the same. So what that Business Week article means is that the same way that our technology will prevent copying from CD to CD, it will also prevent making wav files, which are in turn turned into MP3.
CC: Thank you very much.
MT: You're welcome. I want to thank everybody for joining us today.
OP: Ladies and gentlemen, that does conclude your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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