Digimarc Corp (DMRC) 2002 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, my name is Paul and I will be your conference facilitator. At this time I would like to welcome everyone to Digimarc's third quarter 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 one on your telephone keypad. If you would like to withdraw your question press star then the number two on your telephone keypad. Thank you. I would now like to turn the conference over to Mr. Bruce Davis, Chief Executive Officer of Digimarc; please go ahead sir.

I would like to welcome everyone to the conference call today. With me is E.K. Ranjit, our CFO, and Paul Gifford, our President and COO. We have released third quarter financial results today that exceeded our Q3 guidance for revenues and EPS, and included positive cash flow for the quarter. The purpose of this conference call is to give you a summary of our financial results, and an update on significant business developments during the quarter. We will respond to your questions at the end of the call; however, first I'd like E.K. to review the financial information contained in our 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 will be making forward-looking statements, which are subject to risks and uncertainties. These forward-looking statements including our comments about our expectations for future results, growth areas, revenues, and the earnings per share are based on information currently available to us. They are subject to change, and the 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 contained in our SEC filings including our Form 10-K, filed on April 1, 2002 and our Form 10-Q for the second quarter filed on August 14, 2002. A replay of this conference call will be available for one week through web cast located on our Investor Relations web site at www.digimarc.com, or www.streetevents.com.

Now, turning our discussion to the third quarter 2002 financial results. First, for a review of the income statement, I am pleased to report that revenues for the third quarter of 2002 were a record 26.5 million up 23.4 million or 765 percent compared with the third quarter of 2001 and up 5.7 million or 27 percent sequentially from the previous quarter. The dramatic increase in revenues from last year is due to the acquisition of the ID Systems business. The sequential growth, however, resulted from strong performance in the ID Systems, government programs and IP licensing activities. Within the ID Systems revenues from domestic programs grew 11 percent sequentially while the internal revenues grew 92 percent from quarter-to-quarter.

Growth in the international revenues was substantially attributable to certain large event-driven sales that occur from time-to-time in our international business. Specifically in the third quarter sales to support mortal registration programs. Such sales occur periodically and can cause revenues to spike about normalize trends. In other areas licensing revenues were strong and our Federal Government and Central Bank activities reported solid performances.

In the commercial solutions area, although Q3 revenues were soft we booked our first contract for a pilot program using our Digital Watermarking technology for authentication of identity documents other than driver's licenses. Third quarter total revenues of 26.5 million significantly exceeded the range of guidance provided at our last earnings release call. Gross margin for the quarter of 35 percent was lower than the 42 percent reported last quarter due to an unfavorable revenue mix.

Lower margins in the event of driven sales international sales program before to above contributed to the relatively low gross margin in the quarter. We expect gross margins to improve in the fourth quarter to approximately 40 percent consistent with margins reported in previous quarters. Operating expenses for the third quarter of 2002 were 10.4 million down just about 2 million or 16 percent from the last quarter. The reduction in operating expenses is as result of a prudent cost management and continuing consolidation and stream lining of operations in all areas of the business.

We will continue to responsibly manage expenses and expect to achieve further modest reduction in operating expenses in the fourth quarter. Operating expenses include amortization of intangibles and certain expenses related to the transition of the ID Systems business. During the quarter we recorded non-cash expenses of approximately 450,000 dollars related to differed employ stock auction compensation charges, which is inline with the charges taken in previous quarters. Other income net of approximately 240,000 was in line with our expectations but substantially down from the prior year due to the lower interest rates on lower cash balances. The activities discussed above resulted in a net loss of 928,000 in the third quarter of 2002, 2.5 million or 73 percent better than the 3.4 million loss reported last quarter. Net loss per share for the quarter was 5 cents based on 17.46 million weighted average shares down from a loss of 20 cents reported in the previous quarter and 1 cent better than the street consensus. With regard to the balance sheet our cash, cash equivalence and short-term investment balances were 53 million, up approximately 900,000 dollars from last quarter due to cash generated from operations, effective collections and other cash management initiatives offset somewhat by continued capital expenditure related to ID Systems infrastructure build out and program implementations. Accounts receivable decreased 4.7 million from 20.8 million in the last quarter to 16.1 million in the current quarter on increased revenues.

The third quarter day sales outstanding or DSO was approximately 63 days, which improved over the 87 days for the last and better than our estimate of 70 days. During the quarter we completed the process of obtaining reassignment of state driver's licenses contracts to Digimarc from Polaroid. The process of obtaining reassignment of contracts to Digimarc was a one-time acquisition related activity. We expect our fourth quarter DSO to be in the range of 60 days to 70 days.

Inventory net results was at 4.9 million down 1.2 million from 6.1 million reported last quarter. The reduction in inventory is as a result of improved inventory control stood in place resulting in increased inventory returns. Inventory includes materials to be used in manufacturing ID cards and consumable supplies we sell to our customers. Long-term assets increased from 49.3 million in the last quarter to 51.1 million primarily as a result of program asset additions and IT infrastructure build out in ID systems, net of depreciation of assets already in use. In summary, in the third quarter we generated record revenues, positive cash flow, and EPS better than street consensus. We also continued to focus on our financial goals by improving operating efficiencies and reducing operating expenses through streamlining and consolidation of operations, while continuing to grow our revenues from quarter-to-quarter. Our balance sheet remains strong with 53 million in cash, cash equivalents and short-term investments. Now I would turn the discussion back over to Bruce.

Thank you E.K. We continued with the trend of quarterly growth and revenues in conjunction with decreasing expenses in Q3 and as we target to achieve profitability in Q4 for our guidance that's the beginning of the year. Overall financial performance was quite good despite generally unfavorable economic conditions continuing around the world. We did well amongst financial performance too as we would begin to work on a number of new contracts concerning classified or otherwise confidential government projects, licensed warrants, and settlement of longstanding litigation and scored a major competitive win in driver licenses in the state of Florida. Recognizing the cost effectiveness is the key ingredient of success in these lean times we are continuing our company-wide efforts to streamline our operations wherever possible.

During the quarter we implemented further changes that Digimarc ID Systems to improve margins and enhance its competitiveness. The associated streamlining of operations was expected to result in net reduction of workforce at the end of Q4 of approximately 70 employees and contractors. Meanwhile we have made substantial progress in improving the quality of service to ID Systems customers. These improvements should enhance customer satisfaction, retention, and our reputation for high quality service and lead to lower cost of ongoing maintenance of the effected systems.

We booked contract extension during the quarter with so many of our existing driver license customers including Georgia, Maryland, New Jersey, Rhode Island, Texas, Vermont, and West Virginia. The contract extensions added nearly 14 million dollars to our backlog as we enter Q4. In another important development during Q3, we installed and began live use of our largest facial recognition system today. The Scalable System is being deployed by an existing customer as an upgrade to match new driver's license applicants against millions of existing license photos. To identify, to investigators, individuals submit their applying form for already possessing multiple driver's licenses. In government programs work with the central bank is going well. And business in the Defense and Intelligence areas continues to grow. We publicly announced one of our contracts in this area relating to demonstration of our secure ID technology founded by the Air Force Research Lab.

This project provides an opportunity to demonstrate use of Digimarc's secured digital watermarking technologies for authentication, forensic tracking, and authentication, linking and Access Control Devices. Turning to our commercial solutions area, we completed the developmental solutions providing for authentication, linking and forensic tracking in various types secured personal identification systems, as well as an innovative new solutions for counterfeit detection in consumer packaging.

During the quarter one of these watermarking solutions was selected by a leading European security printer for a pilot application in the self-authentication of government issued personal identification documents and in travel documents. In licensing, we concluded our second consecutive successful pattern litigation and Xerox Corporation entered into a license with us for certain audio watermarking solutions.

We now have two audio watermarking licensees; activity content providing forensic tracking solution for pre-released music and Variance providing broadcast monitoring and copied protection solutions. Audio is a promising area for watermarking, for instance we are seeing increasing use of audio watermarking for months in our licensees by major record labels to compare piracy.

News articles have appeared such as the recent one in the LA Times describing how one of music use digital water markings to track a potential leak on advance copies of Faith Hill's new album Cry. That was sent to journalists and radio stations. The watermarking technology that they used was ours. We anticipate increasing use of watermarking by the record labels for determining how pre-released music leaks into unauthorized channels including file saving networks. The DVD-CCA process was selecting a consensus watermarking solution for DVD copy of prevention and play control is continuing.

They believe that the DVD-CCA is likely to request an extension of the VWM bid so that they can bring the matter to both of the members, which is the prescribed procedure given that the Interim Board of Directors failed to reach consensus earlier this year. We are supporting the DVD-CCI process as well as working on alternative path to adoption including private company negotiations and policy initiatives. Our DVD CCA process has been stalemated. Other revenues from adoption of video watermarking are showing promise. Notably, the European Broadcast Union announced recently it is testing the color tracks, video watermarking and tracking system, that is licensed under patents, to monitor the broadcast of news programming and television stations across Europe. The EBU is the world's largest professional association in the audio-visual sector with 118 members in 79 countries in Europe and around the world. Members include every national public service broadcaster in Europe. More than 30,000 news items are carried by the EBU's Eurovision News Exchanges over digital, satellite, and fiber optic networks. As one of the world's most prestigious broadcasting organizations, the EBU is highly influential among the producers and broadcasters of television content worldwide. Our intellectual property assets continued to increase as well with 16 new US patents issued bringing our total to 76 containing over 1700 claims. We filed 22 more applications during the quarter bringing our total pending patent applications to 328.

In summary, despite difficulties in the global economy, we are making good progress toward our previously announced goal of profitability by the end of this year. Revenue growth is fueled by continuing demand for secured personal identify document system and solutions for enhancement of copyright protection and by expansion of our services to US and other national government customers. This continuing growth coupled with vigorous financial and operational discipline should permit us to accomplish our financial objectives. E.K. will now provide you with details of our guidance for Q4 and for the full year 2002.

As discussed earlier, Q3 revenues were above our normal trend due to certain large international sales that is not expected to reoccur in Q4. Nonetheless, international sales will be strong and are expected to be above Q2 level. With this in mind, we estimate that revenues for the fourth quarter will be in the range of 22 million to 22.5 million. We expect to be to generate modest profits in Q4 with earnings per share of 1 cent to 3 cents on a fully diluted basis. For the full year, we anticipate revenues would be in the range of 87.8 million to 88.3 million and expect the net loss per share to be in the range of 46 cents to 48 cents. Before we conclude, I would like to give you an update on upcoming investor relations activities in this quarter. On October 28th, we will be in Denver meeting with current and perspective investors, November 5th and 6th we will be presenting at EEA classic conference in San Diego, California. This concludes our presentation; we now welcome your questions.

At this time I would like to remind everyone if you would like to ask a question press star then the number one on your telephone keypad. One moment please for your first question. Again ladies and gentlemen that's star then the number one on your telephone keypad. Gentlemen there are no questions at this time do you have any further comments?

No we don't, I would like to thank everyone for participating today.

Thank you again everyone for joining today's conference call. This concludes today's Digimarc third quarter earnings release conference call, you may now disconnect.