Digimarc Corp (DMRC) 2002 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Digimarc Corporation Q1 2002 earnings release conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone key-pad, and questions will be taken in the order they are received.

If you would like to withdraw your question, press star then the number 2 on your telephone key-pad.

I will now turn the call over to Mr. Bruce Davis, CEO of Digimarc Corporation.

Sir, you may begin your conference.

Hello. I'd like to welcome everyone to the conference call today. With me is E.K. Ranjit, our CFO, and Paul Gifford, our president and chief operating officer.

We released first quarter financial results today that exceeded our Q-1 guidance for revenues and ETFs. The purpose of this conference call is to provide you with a summary of our financial results and an update on significant business developments during the quarter.

We'll respond to your questions at the end of the call; however, first I would like E.K. to review the financial information contained in the press release.

E.K.?

Thank you, Bruce.

Before we start our discussion on the financial results, I would like to go over a couple of items. First, I would like to point out that during the course of this conference call we'll be making forward-looking statements which are subject to risks and uncertainties. These forward-looking statements, including our comments about our expectations for future sales and expenses, are based on information currently available to us. But they are subject to change, and actual results may differ materially from our expectations.

For further information about these risks and uncertainties, I would like to refer you to the risk factors in our SEC filings including our form 10-K filed on February 1 - I'm sorry, April 1, 2002 and our form 10-Q for the third quarter filed on October 14th, 2001.

The replay of this conference call will be available for one week through webcast located on our investor relations web site at www.digimarc.com or www. .com.

Now, turning our discussion to the first quarter 2002 financial results, first it is important to note that this is the first full quarter since our acquisition of the ID Systems business from Polaroid Corporation. The acquisition was completed on December 21, so our first quarter consolidated results reflect activities from the new business for the full quarter.

Now, for a review of the income statement. I'm pleased to report revenues for the first quarter of 2002 were a record 18.5 million, up 377 percent from the fourth quarter of 2001 and up 394 percent compared with the first quarter of 2001. This dramatic increase in revenues is largely attributable to the acquisition topped with strong performance from the ID Systems business in this quarter.

Federal government and central bank activities also reported solid performance, while the commercial solutions area continues to be slow. Revenues from the ID Systems business accounted for 16.3 million of the quarter revenues.

First quarter revenues of 18.5 million significantly exceeded the range of guidance provided at our last earnings release call, which was in the range of 16.8 million to 17.2 million. As expected, the gross margin for the quarter of 42.5 percent was below the 50 percent reported last quarter but significantly exceeded our expectations for the first quarter. The better-than-expected gross margin was driven by a healthy mix of high margin international and add-on revenues combined with the lower-than-anticipated field operations costs and depreciation charges in the ID Systems business.

Operating expenses for the first quarter of 2002 were 12.3 million, up 2.6 million from the last quarter, primarily due to the inclusion of a full quarter of ID Systems operating expenses in the first quarter. Operating expenses include amortization of intangibles and certain expense related to the transition of the ID Systems business from Polaroid corporation.

During the quarter we recorded non-cash expenses in the amount of approximately $500,000 related to deferred employee stock option compensation charges, which is in line with the charges taken in the previous quarters.

Other income net decreased to $296,000 in the quarter due to lower interest rates on lower cash balances.

The activities discussed above resulted in a net loss of 4.2 million in the first quarter of 2002. Net loss per share for the quarter was 24 cents based on 17.1 million weighted average shares which is two cents better than the first call consensus of a 26 cents loss and better than our guidance of 25 to 28 cents given on the last conference call.

With regard to our balance sheet, cash, cash equivalent, and short-term investment balances were 57.5 million, down approximately 4.1 million from last quarter due to cash used for working capital in our digital watermarking side of the business, which consistent with the cash used taking the prior orders.

The ID Systems business generated slightly positive cash flow in the first quarter.

Accounts receivable increased from 15.5 million in the last quarter to 20 million in the first quarter.

The first quarter dates outstanding or DSO was approximately 90 days, which was higher than our expectations. The process of reassigning ID Systems customer contracts to Digimarc was slower than expected, which resulted in a higher DSO in this quarter. We expect to have this process completed within the next 30 to 60 days.

The process of obtaining reassignment of the contracts to Digimarc is a one-time acquisition-related activity.

Going forward we expect our DSO to 50 days.

Inventory net reserves at year-end was approximately 6.2 million, up 500,000 from the fourth quarter. And this was consistent with our expectations. This inventory represents materials to be used in manufacturing I.D. cards and consumable supplies sold to our customers.

Long-term assets increased from 44.3 million in the last quarter to 47.7 million, primarily as a result of program assets additions in the ID Systems. This was offset by depreciation of assets already in use.

The addition to the assets activities in building ID card manufacturing systems and general infrastructure fixed assets.

In summary, in the first quarter which includes our first full quarter of results of operations from the ID Systems business, we generated record revenues. Spending was in line with our expectations, and we exceeded first call consensus EPS by two cents.

Our balance sheet continues to remain strong with 57.5 million in cash, cash equivalent, and short-term investments.

Now I'll turn the discussion back over to Bruce.

Thank you, E.K.

The acquisition of Polaroid ID Systems business in the last quarter of 2001 provided us with a key platform for advancing our mission. We are now the leading supplier of driver's licenses in the U.S. and a leading supplier of personal identity systems worldwide. This new capability combined with Digimarc's expertise in secure document and imaging systems makes the company an increasingly valuable vendor to many government agencies on both the federal and state level and to increasingly security-conscious private agencies and enterprises.

We are very pleased to have Digimarc ID Systems as another key building block in our long-term asset value creation plan following the unfolding panorama of digital watermarking and commercial photography, digital imaging, bank notes, movies, television, publishing, and packaging.

I want to take this opportunity to welcome our new employees and to thank them for an excellent first quarter of performance.

Digimarc ID Systems turns in an excellent performance in its first quarters thanks to heroic efforts by ID Systems employees and other Digimarc employees who are supporting the transition of the business from Polaroid.

Financial performance is also enhanced by growth in international business and add-ons to existing systems requested by our customers.

We have this critical role of enhancing global security to other leadership positions including supplying an anti-counterfeiting system to leading central banks, our joint venture with leading consumer electronics companies to deter video piracy, and our partnerships with International Paper and Westvaco Brand Security to promote novel packaging applications.

Our leadership in developing markets for digital watermarking and personal identification systems is supported by a growing patent portfolio now totaling over 50 patents issued with more than 1,000 claims and 305 more patents pending in digital watermarking, personal identification, and related technologies.

It was a very busy quarter all around the company with many encouraging signs of strategic progress. We continued making very good progress with our central bank customers on the bank note counterfeit deterrent system.

In other government business news I'm pleased to report that we began generating revenues from national defense and intelligence markets during the quarter.

In licensing we expanded our global reach by licensing Digimarc MediaBridge technology to DigiTreal, a Korean company, to provide Digimarc MediaBridge solutions in South Korea to designers and publishers of print advertising, marketing collateral, highway cards, gift cards, and other printed marketing materials.

Digimarc also made an equity investment in the company along with Samsung, the Industrial Bank of Korea, and Sumitomo.

In the video area, Phillips and MediaLink announced the launch Teletrax broadcast monitoring services last week at the National Association of Broadcasters conference. Teletrax will use the Phillips WaterCast system to monitor and report usage of video to program producers, advertisers, and broadcasters.

A broadcast monitoring system was contemplated in the previously announced WaterCast license that we granted to Phillips.

In other video watermarking developments the pace of work on testing and clarification of terms of the VWM Group bid to the CPCWG for a solution to provide copy prevention and play control for movies increased dramatically, as did the pressure by the motion picture industry for governmental intervention to protect copyrights if the computer industry does not begin making more progress in implementing copyright protection technologies in digital recording devices.

To support the increased scale of complexity and opportunity to Digimarc resulting from the acquisition and continuing progress in other areas, we added two strong and seasoned senior executives to our corporate management team. Bob Chamness has joined us as General Counsel, and Michael Gorriaran joined as Chief Marketing Officer and VP of sales. Both of these gentlemen have had long and distinguished careers.

Bob has more than 25 years legal and business experience and is a nationally known expert in financial services, law, and regulations. During his career he has directed the legal and integration activities tied to more than a dozen acquisitions including personnel, vendor, and third-party concerns. He also has extensive experience handling the legal and integration issues of large multi-location operations and negotiating mutually beneficial customer and vendor agreements.

Michael spent 18 years serving in various general management, marketing, strategic planning, and sales management roles at Xerox Corporation. While at Xerox he was responsible for leading domestic and international organizations. He was also responsible for launching new products and leading business development initiatives in the areas of professional services and business processing out-sources within Xerox's high-volume database, printing, publishing, and electronic document management businesses.

We're looking forward to an exciting and prosperous remainder of 2002 and beyond. We believe that despite acknowledging that the consumer sector of the economy continues in a funk, our crystal ball is no better than those of other companies in divining when the economy will show some renewed vigor. Until then, we expect growth in our commercial solutions to be challenging.

We are fortunate that the substantial majority of our revenues are projected to come from customers and applications that are not directly correlated with economic cycles, primarily from issuance of driver's licenses and other identity systems pursuant to existing contracts and from our work with central banks on the anti-counterfeiting system where the project budget for 2002 has been agreed.

We believe that during the continuing recession the company will experience growth in other security market opportunities such as national defense where budgets have been increasing despite the difficult economy because of countervailing concerns about national security and terrorism.

When the economy improves, these engines of growth will continue a pace. All should be easier to gain trial and adoption of our Excalibur, ImageBridge and MediaBridge enterprise solutions.

Netting all these factors together we believe it is appropriate to increase our estimates of financial performance for Q-2 and for the remainder of 2002.

E.K. will now provide you with details of the revised guidance.

E.K.?

Based on the activities Bruce discussed, mainly in the ID Systems business, U.S. government, and the - and in the central banks, we estimate that revenues for the second quarter will be in the range of 19 million to 20 million and a loss per share of 15 cents to 17 cents including certain continuing transition related costs.

We anticipate full year 2002 revenues to be in the range of 80 million to 84 million. We expect the net loss per share to be in the range of 39 cents to 43 cents. And we continue to expect to achieve break-even in the second half of the year.

Before we come forward, I would like to give you an update on our coming investor relations activities in the second quarter. On May 6th we will be presenting at J.P. Morgan H&Q Technology Conference in San Francisco at the Westin St. Francis at 11:00 a.m.

On May 9th we'll be holding our annual shareholders meeting in Portland Oregon at the RiverPlace Hotel. The meeting starts at 2:00 p.m.

As far as our investor relations program during the week of May 13th, we'll be in Denver and Salt Lake City meeting with existing and prospective institutional investors.

This concludes our presentation today. We now welcome your questions.

At this time I would like to remind everyone in order to ask a question please press star then the number 1 on your telephone key-pad. Again, in order to ask a question, please press star then the number 1 on your telephone key-pad.

We will pause for just a moment to compile the Q and A roster.

Your first question comes from of .

Good afternoon Bruce, and E.K.

Bruce, I was wondering if you could first delineate which operating line the defense intelligence revenues - yes, was that for I.D. cards or was that for digital watermarking technology? And, secondly, could you give us - these days it seems to be - we need an up-to-the-minute briefing on what's going on with video and movie copy protection.

With respect to your first question, Bill, we're not permitted to discuss that kind of information. The customers in this segment are particularly sensitive, and so I've given all of the information we're authorized to give.

Fair enough.

With respect to VWM and video copyright protection, it is a rather amazing piece of activity that we're seeing right now all around Washington and the entertainment IP and consumer electronics industries.

From the flurry of activity that had been noted in our prepared remarks, I believe we may be close to some kind of decision. Again, the exact timing of it and the decision that will be made are difficult to predict. It's a very complicated situation. There has been an affirmation in a number of public settings of the value of watermarking in the overall management of copyrights, including statements by Craig Barrett of Intel and Parsons at AOL Time Warner. So at the most senior levels at the most relevant companies there's an appreciation that watermarking is an important technology; however, the way in which events unfold in the short term is, I think, too difficult to discern because of the complexity of the activities and all of the various parties that are involved.

How do you think events will unfold in the sense of what are you looking for next and what has happened to the competitive bake-up - -off that you've been involved in?

Answering the first part of your question first, I continue to look in a wide variety of places for signs of progress and signs that there's an acknowledgement of our technology as a part of the overall architecture. There I continue to get reassurance from many different places.

With respect to the DVD CCA and the competition for the bid there, I don't really have any clear information. The - as I've mentioned, they've been asking us for clarification of terms. They've been engaging in analysis of test results. There appears to be an interest in moving forward that I imply from the high level of activity. But that's about all I know.

But you're still competing with Toshiba?

That's correct.

OK. Thanks very much.

Your next question comes from Murray Arenson of Morgan Keegan.

Thanks. Good afternoon, guys.

I wondered if you could give us a little more clarity with this being the first I- - full quarter with ID Systems. Can you break down margins for ID Systems alone versus the rest of the business and maybe give us some thoughts on - since they out-performed what you expected this quarter - where they go going forward throughout the rest of the year?

The ID margin actually came in a little better than what we had anticipated. It was roughly in the range of about 40 percent. And going forward we expect to see similar - margins similar to that in approximately the 40-percent type of range.

OK. And on the operating side have you fully integrated the operation? Should we look for any additional changes or reductions on the GMA side or anything like that?

At last quarter when we gave our guidance, we indicated that the transition was going to take about six months. And we are very much on track, and so we expect to be substantially done with the transition work by the end of June time-frame. So there will be some more continuing transition-related costs in the second quarter.

OK. And maybe, to the extent that you can - I mean we talked after you made the acquisition about how this is a nice, predictable revenue and cash-flow stream because it's tied to long-term contracts and it's tied to things like driver's licenses. And yet first quarter out of the box we're seeing, you know, a good surprise, but a surprise nonetheless. And I wondered if you could kind of explain to us, you know, how that happens and, you know, how that - how we should look at your confidence level or upside potential going forward.

Right. Our expectations and projections we gave was based on contracts in place. And so that gives us a certain amount of, you know, minimum threshold that we can expect in terms of revenues. Things like add-on revenues which we don't really have a lot of on that, those are the kind of things that will give us an upside. Activities in international markets is also an upside opportunity for us. But there is no way to predict that. So you should go with our forecast, our guidance that we gave you based on our contracts.

So does that mean that this past quarter we actually saw additional revenue that you hadn't expected from, you know, add-on features and services?

Yes. There was some add-on revenues as well as some nice international revenues which added much-better-than-expected margins. So it was nice to see that in the very first quarter.

And, lastly, I just wondered if you could give us a quick overview as far as - I know it's a little convoluted as to what states have driver's license contracts that are in play, but maybe you can just give us your of where the activity is on that front and which ones are yours and which ones are potential - potentially yours to take from somebody else.

OK. The way we have - account for a program as our customer is when we start generating revenues from that program. And we stop counting them as a customer when we cease to generate revenue from the customer. So, based on that, today we have 36 states - state programs. And in any one year there will be about five or six contracts that will be up for renewal. And we have to go through the bidding process to figure out, you know, the outcome of those five or six contracts.

OK. I guess what I'm asking is are there any states of significant size that you're looking at that are on the table right now that you could stand to lose in the next three months or that you could stand to gain in the next three months? Can you answer that?

It would be premature for us to make that prediction.

But there are some in play that are, you know, noteworthy like that?

Yes, there are, you know, a few contracts that have bids in the process. But it's, you know - it would be premature for us to make any kind of prediction at this point.

Great. Thanks very much.

Your next question comes from Jennifer Jordan of Wells Fargo Securities.

Congratulations E.K. and Bruce, on a good quarter here...

Thanks...

... from your product. It's great to see this ID System starting to have the effect you wanted.

I was wondering first if you could address - and I know you may not be able to. There's been recent commentary in the press about a change in the way that the U.S. does its passport technology with additional security features added into the passport and needs to approve them more frequently, apply more - earlier when you're traveling abroad. Were you part of that process at all? I know it was something that early in your existence was discussed.

Jennifer, we're not allowed to discuss any of the security applications that we're involved in. And so I can no more say yes than no...

OK.

... to individual applications.

The view of our customers - just so that you understand why we have the posture we have - is that talking about covert security measures only us as a vendor. The cost to them is potential compromise in the security of the system. So they just won't permit it.

Thank you, Bruce.

That's true across the board.

When you - the next question relates to the contract that you announced today with Hong Kong for ID Systems for the City of - or Colony or Region of Hong Kong. Could you talk about how that may or may not be included in your current guidance and what other international-related bids are out there? Or what other countries are you bids in that we should be watching for, since international is upside?

Regarding Hong Kong, it's about a 12-month program. The revenue from that, we expect that to start in this year. And so they may be part of that coming into this year, revenue numbers.

Later in this year or earlier?

We don't know the exact timing of it. I would expect that we'd start that program in the next few months.

OK.

Jennifer, to address the second part of your question, maybe I can embellish it better on what E.K. said a few minutes ago. In offering guidance we're trying to be pretty conservative and to - as I've talk about in the past - in our business model skew the - any kind of surprises to the upside.

Right.

In international business we have a tremendous amount of business that may come to fruition.

However, we would prefer not to forecast that business until we have a reasonable degree of confidence that we're actually going to get it as opposed to being - bidding on it. So we'd rather not try to describe all of the things that we're pursuing internationally so that people's expectations might get out of whack with what we actually...

Are there any specific regions that we should be wa- - paying close attention to, though - geographic regions like...

Well, we...

... countries that we should be watching that are more in the - where you're definitely in the bidding process and there's - in the next few months we should see some type of decision one way or the other?

We have bids that are active in every major region of the world...

OK.

... today. I think the Europe/Africa/Middle East marketplace is a very promising one. Latin/South America would be, except for the tremendous amount of political instability right now. And what's interesting is that the political instability is actually a leading indicator of opportunity for us because the instability is often followed by some effort to identify the citizens and to engage in either a process of having them register to receive services or register to vote.

But while the turmoil continues, it makes it very difficult to do business.

To get anything back stat.

Yes.

You can't do anything right now ; that's for sure.

Finally I'm wondering, again, regarding the sort of contention that's going on in the environment around the DVD watermarking or watermarking of systems. Do you have some sense of how quickly things could work through Congress? I know there's legislation now pending that would require the developers and technology manufacturers to incorporate security systems. And there's also a big protest by developers against that legislation. Do you have some sense of what's the kind of momentum through pushing that through?

Well, there actually are a rather large number of initiatives in Washington that, if they were to go through fruition, would be extremely beneficial to our company in the areas of protection of entertainment copyrights, national ID, and increased security in border crossings and so forth.

Now, with respect to the entertainment content, I believe that most of the legislative initiative is intended to cause private industry to come to agreement.

OK.

I do believe that if they don't, that the initiative will continue. However, generally speaking those processes take a couple of years or more. And so I wouldn't expect, you know, instantaneous action by the federal government in the event that private industry doesn't make substantial progress.

So this is the stick for private industry to...

It is.

... get going?

Exactly. And, you know, I don't think anyone wants the government to mandate a particular technology for protecting entertainment content because, in fact, technologies change...

That's right.

... and policies change.

One of the interesting attributes of digital watermarking - which we are doing our best to make sure everyone in Washington appreciates as well as in the relevant private sector - is that watermarking is a means to enable policy. It doesn't have - watermarking technology doesn't have an inherent bias like encryption technology - it definitely locks things up; that's all its good for. Watermarking technology identifies the content and allows the management of the content through any kind of system architecture, through any kind of policy judgment.

And so if Washington is serious about helping the entertainment industry protect its copyrights, then watermarking is a technology that's a fundamental enabler of policy and thus in the debates that are going on between, you know, how much control is the right control, there will be no opportunity for any control if they don't do a better job of identifying the content.

And thus we would encourage everyone to adopt watermarking early even before the final policy judgments have been made.

OK. And lastly, to piggyback on the question about contracts that were potentially up to bid in the U.S. market for different states, I think in the last conference call you'd mentioned a number of states. There was Tennessee. There was New Jersey. There were a few others. I'm wondering if some of those have closed already, and what were the others that are still out there?

Jennifer, as you know, we announced the Tennessee - we won that contract.

Right.

There was press about Connecticut being finalized.

Right.

And those are the only ones I know of.

OK. And do you know any - which ones are still out there? So New Jersey's still out there and a couple of the others?

Yes, they are all still out there.

OK. Thank you, E.K.

You bet.

Your next question comes from Sasha Zorovich from Robertson Stephens.

I just have a couple of questions. The first one is when you approach with your bid a particular DMV, how does your bid in quality really differ from the one or the approach differ - how does it differ from the approach that had?

The bidding process is defined by the customer, generally. And it often has two broad components - price and technology. You might want to call it price and services. And they're weighted. And the weightings may vary from state to state. And so you could think of it as - responding to an RFP - describing the ability to deliver against the prescribed features and then the assessment of the quality, stability of the vendor and so forth of being one set of factors, and then the other factor being price.

And is there sort of a in that? Is there somehow - how do you come let's say on price versus or - above or below or is there no consist- or it really differs from one DMV to another?

Each bid is unique today. There is a - you know, a lot of talk about standardization. Frankly, based on the first quarter of experience with ID Systems, I believe that there will be more talk than action because there is a substantial amount of local interest in the character and feature set of the driver's licenses. And so each state makes its own judgments about what they want the system to do, what they want the card to look like, and all other aspects of those elements of the system.

So to the extent there is some federal funding perhaps, some federal influence encouraging some standardization, I still expect there will be substantial variation going on for the rest of our useful lives.

I see. OK. And then finally my question is what is the size of the Hong Kong contract, and could that perhaps compensate the 7.5 million from Connecticut?

This is just an approximation, Sasha. The Hong Kong contract is somewhere in the range of about $1.5- to $2 million.

OK.

And that's over a 12-month period.

So the timing is different than Connecticut.

Right. Because it's just one year versus the five to six.

So if you look at it on an annualized - just on a annual basis, why it's comparable.

OK. Now, then what I'm sort of alluding to a little bit then what exactly is that that - you're obviously guidance for the remainder of the year. And what is it exactly that you're then basing that on? Is it international contracts, or now - since it's early to tell for these states that are currently in play - is it based on the maybe government, sort of the - you were saying this sort of the intelligence business that you are getting revenue? Where is it really that it's now giving you more comfort to the guidance?

Based on several factors - this is the first quarter that now where we - you know, we have a little bit of history now. So we have a certain level of comfort with the kind of things we're seeing on the ID side of the business. And as previously we discussed, our guidance was primarily based on a minimum threshold for contract revenues based on contracts already in place. And obviously, you know, there is some flexibility on top of that in terms of add-on revenues and international revenues coming in and so on. So we've got a little more visibility there. So that's one piece.

The second piece is, as Bruce indicated earlier, we are beginning to see some activities with the federal government programs. And so those are the two main factors.

Great. Thank you very much.

Your next question comes from Steve Lidberg of Pacific Crest Securities.

Yes. First of all I was wondering if you could comment on what your normalized operating expense is going to look like once we come out of this transition period with the integration of the ID Systems business.

Steve, it's not substantially different from the guidance that we have given previously. The - if you remember the guidance for the year, we had built in some transition cost in the first half of the year, and it gradually fades away as we get into the second half of the year. And that guidance from last quarter hasn't changed.

OK. And, E.K., looking at the balance sheet, the accounts payable item was up about $8 million sequentially. Can you walk through that a little bit?

Yes. It's up about $6 million.

OK.

That's entirely based on the ID Systems business coming on board. The previous accounts payable of about $3 million was based on a $12- to $15 million revenue base. Now that our revenue base is in the eighty-plus-million range, you can expect payables to go up. And you also see a thing. So it all kind of washes.

Great. And you talked a little bit about DSOs. What should we be looking, going forward as your ability to take those down?

Yes, my target is about 60 days. I don't know, you know, whether it may take us one or two - a couple of quarters , but we're going to be moving very hard in this quarter to bring the DSO down.

My expectation is we're probably in the 60 to 70 range - somewhere there.

And, lastly, what is the head count at the end of Q-1?

Head count including we - in the ID side of the systems business we employ a lot of contract labor people. But including those contract labor people, we are at around 480 employees.

Great. Thank you.

Your next question comes from Phillip Leigh of Raymond James.

Hi. Can you hear me OK?

Hi, Phil.

Yes, it's fine.

OK. Bruce, based upon your comments, I kind of got the impression that you might be messaging, you know, with respect to the economy and separating that from the ID Systems business. You might be messaging that the watermarking business is going to be kind of flat for the rest of the year; is that what you're saying?

No. Actually I'm being more precise than that. The commercial solutions part of the business is challenging right now. The buying decisions are being delayed. The selling process is more cumbersome than usual. It's just it's very difficult to sell into enterprises right now because there's continuing pressure on departmental budgets, and everybody's trying to squeeze every nickel. I don't expect that to continue forever. I think it's time - a time-and-place problem that everyone's experiencing right now. And we're going to keep working the solutions and working the customer base. We're going to try to do it in a responsible investment manner so that don't waste money chasing people when they're not in the mood to buy. But we don't see any impact fully that on the government side of the business.

Watermarking plays a very important role in our government business, and so that's where I - you know, your characterization was the watermarking business versus ID Systems. I don't think that's the correct breakdown. It's actually commercial solutions versus all other.

Yes. But you indicated that you've already negotiated your government business in the watermarking area or the biggest part of that business for this year, right?

We - what I indicated was that we had agreed on the 2002 budget with the central banks. There is some opportunity for that budget to be increased. And I noted that we have begun to generate revenues from national defense and security. And so I think there's upside in the government programs business in general.

I think I just maybe incorrectly inferred that - you know, that the commercial bank business or the - excuse me, the central bank business is the biggest part of the 2.1 million that you reported.

That's correct.

And I also kind of inferred that your kind of expecting that to go along flat?

You may be inferring incorrectly. What we're trying to communicate is that we have a budget for the year which tends to indicate the minimum level of spending. And that doesn't mean that there's no upside.

OK. Would it surprise you if there was no settlement by the - I can't remember the name of the standards board that looks at this watermarking for DVDs. Would it surprise you if there was no settlement on the proper standard by the end of the calendar year?

Yes, I think that would surprise me. I have much less confidence in my ability to predict the short term. But I really think that there's enormous pressure building. There's widespread acknowledgement of the significance of the technology. It seems like something will get going.

OK. Thanks.

OK.

Your next question comes from Jennifer Jordan of Wells Fargo securities.

Just a quick housekeeping follow-up. Could you go over again the number of patents filed, where you are with that, and any update on the legis- - the litigation with Verance?

With respect to patent filings, I don't have the precise number. I apologize. E.K. can get that to you later if you're...

OK. That's fine.

... if you're interested. But we're probably in the range of three twenty-five to three fifty at this point.

And an update on the Verance...

How many are approved now, Bruce?

We have 53 issued patents.

Fifty-three?

We have another 12 to 15 that have been approved and are pending issuance.

But not issued? OK.

Now, with respect to Verance, there were various court actions during the quarter - nothing, I think, particularly noteworthy to the general audience other than we did - as we reached the proper stage in the litigation - specify 56 claims in five patents that we believe are infringed. Forty-three of the 56 have been through the successful first two re-exams.

So we have now stated that. We still have two patents in re-exam, and we believe it's likely that will bring other patents to bear on the litigation in the not-too-distant future.

When do you think those two will be done?

That's up to the patent office. I'm not in control of it. I thought they'd be done by now.

OK.

So they'll come out whenever the office is really to deliver them. And then in the - in related news in other patent litigation, we did finally resolve the litigation with Signum Technologies during...

Right.

... the quarter with a consent judgment that resulted in the Court ordering a permanent injunction against Signum products in the U.S. market that were alleged to be infringing.

And Signum gave us a license on all of their intellectual property in lieu of money damages to resolve the litigation. So that was a good outcome with an infringer that had persisted longer in litigation than the Verance has thus far.

Great. thank you very much.

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Thanks everybody. Bye now.

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