Digimarc Corp (DMRC) 2003 Q2 法說會逐字稿

At this time, I'd like to welcome everyone to the Digimarc's second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you'd 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, Mr. Davis; you may begin your conference.

Thank you. I'd like to welcome everyone to the conference call today. With me is E.K. Ranjit, our CFO and Paul Gifford, our President. We released second quarter financial results today. The purpose of the conference call is to provide you with a summary of our financial results and update on significant business developments starting the quarter and our financial guidance for Q3 of 03. We'll respond to your questions at the end of the call. E.K. will begin by reviewing and commenting on 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 risk and uncertainty. Such forward-looking statements include, but are not limited to statements relating to financial guidance for Digimarc's third fiscal quarter and fiscal year 2003. Statements regarding potential future adoption of digital watermarking security features in driver licenses and any implications for potential growth opportunities for Digimarc and its products. The statements regarding expectations from changes to Digimarc's business organization and other statements containing words such as 'believes', 'expects', 'estimates' or 'anticipates' and words of similar import or statements of managements opinion. These statements are based on management's current expectations and are subject to certain assumptions, risks, uncertainties and changes in circumstances. Actual results may vary materially from those expressed or implied from the statements herein or from historical results, due to among other things, changes in economic, business, competitive, technological and or regulatory factors.

More detailed information about these factors is set forth in filings by Digimarc with the Securities and Exchange Commission, including without limitations Digimarc's most recent quarterly report on Form 10-Q under Item 2 managements' discussion and analysis of financial conditions and results of operations. Guidance offered by Digimarc represents a point in time estimates made by management of Digimarc. Digimarc is not obligated to and expressly disclaims any obligation to revise or update any forward-looking statements including guidance, in order to reflect the events or circumstances that may arise after the date of this press release, whether they arise as a result of new information, future events or otherwise.

A replay of this conference call would be available for two weeks through the web cast located on our Investor Relations page at www.digimarc.com or under the sub-category Events as well as www.streetevents.com. Thereafter, the web cast will be available on the Investor Relations page of our website under the category Events, sub-category Web cast Archives.

Now, turning our discussion to the second quarter 2003 financial results. I am pleased to report, that the second quarter marked the second consecutive quarter of profitability. Our revenues exceeded the range of guidance we gave on our last conference call. Earnings per share were $0.01 better than the First Call consensus. World's margins for the quarter and other financial performance indicators continue to improve and we generated a positive cash flow from operations. After the details of the income statements, revenues for the second quarter of 2003 were $22.5 million, up $1.7 million or 8% compared with the second quarter of 2002, and up $800,000 or 4% from the previous quarter. The increase in revenues from last year is due to the continued strong performance in ID Systems.

The past year and half The growth in domestic program revenues, which accounted for $16.6 million of the $20.1 million in ID Systems revenues were driven by higher card issuance volumes compared to previous quarter volume levels and higher per card revenues from new programs. Add-on revenues continued to be limited by tight state budgets. International sales continued to be strong and accounted for the remaining $3.5 million of ID Systems revenues in the second quarter. In other areas of the business, watermarking solutions and licensing showed modest sequential growth driven by higher revenues from financial services and the increased demand for online licensing and compliance monitoring for commercial photography. Second quarter total revenues of $22.5 million exceeded the range of guidance provided at our last conference call by $500,000. For six-months ended June 30, 2003, revenues were $44.3 million, up $5 million or 13% compared to the $39.3 million reported in the comparable period of 2002. Gross margins improved 3.6% compared to second quarter of 2002 and 0.3% from the previous quarter. This marks the third consecutive quarter of margin improvement driven by our continued focus on cost management and productivity.

Operating expenses for the second quarter of 2003 were $10.1 million, down $2.4 million or 19% from the second quarter of 2002 and up $300,000 from the previous quarter. The sequential increase in operating expenses was in line with our expectations and growth in revenues. The 19% improvement from the second quarter of 2002 was as a result of our continuing effort to responsibly manage cost by consolidating and streamlining operations to maximize productivity. For the six months ended June 30, 2003, operating expenses were 19.9 million, down 4.9 million or 20% compared to the comparable period of 2002. During the quarter, we recorded non-cash expenses of approximately $400,000 related to the deferred employees stock option compensation charges, which was slightly below the charges taken in the prior quarters. This PML charge will be fully amortized by the end of this year at lower quarterly amounts as we progress through the year. Other income net of approximately of $150,000 was in line with our expectations and substantially down from the prior year due to lower interest rates on lower cash balances. Provision for income taxes of approximately $50,000 relates to estimated taxes we expect to pay in foreign countries from profitable operations. No provisions have been made for US taxes due to loss carry forwards.

The activity we discussed above resulted in net income of $287,000 for the second quarter of 2003 and diluted earnings per share of $0.02 on 18.54 million weighted average shares. This compares to a net loss of $3.4 million of a basic and diluted loss per share of $0.20 on 17.29 million weighted average shares in the second quarter of 2002 and net income of $29,000 or breakeven diluted earnings per share on 18.35 million weighted average shares reported in the previous quarter. Second quarter basic and diluted earnings per share of $0.02 is at the high end of the range of guidance of zero to $0.02 we gave at our last conference call and a penny better than the First Call consensus. For six months ended June 30, 2003, we generated net income of $316,000 or $0.02 per share compared to a loss of $7.5 million or $0.44 in the comparable period of 2002.

With regard to the balance sheet, our cash, cash equivalent, restricted cash, and short-term investment balances were $51.6 million, up $1.4 million from the prior quarter. Cash outflow for hardware capital expenditures amounted to $1.3 million in the second quarter. While the net accounts receivable balance increased by $228,000 from the prior quarter to $15.4 million, the day sales outstanding improved to 61 days from the 62 days reported in the first quarter of 2003. Inventory net of results was 5.8 million up 142,000 from the 5.7 million reported last quarter. Inventory includes materials to be used in producing ID products and consumer goods supplies that we sell to our customers. Long-term assets increased from 57.3 million in the first quarter to 58.8 million in the second quarter as a result of program asset editions net of depreciation of assets already in use. Deferred revenue increased $1.1 million to $4.5 million as a result of editions related to payments we received from our customers, for which we could not yet recognize the revenue, offset by the regular amortization into revenue of prior balances.

In summary, we generated a profit for the second consensus (ph), exceeded First Call consensus EPS by a penny for the quarter, and exceeded our range of guidance for the revenues. Gross margins continued to improve for the third consecutive quarter. We generated positive cash flow from operations and our DSO continued to improve. Now I'll turn the discussion back over to Bruce.

Thanks E.K. You too marked our second consecutive quarter of profitable operations and the companies sixth consecutive quarter of improved financial performance. Revenue growth coupled with rigorous attention to improving the cost effectiveness of our efforts on depending on the strength. The key is some continuous improvement that includes relentless focus on customer satisfaction, constant assessment of the impact of change within our market or in our investment rates and priorities. Improvements in supply chains management and better aligning of management to these success factors. Most of the recent changes associated with efforts during the quarter were a number of changes in management of primary areas of business. Two important executive promotions were involved. The company by numerous changes involves responsibilities of other executives and senior management. Under the new management structures Scott Carr, former Vice President and General Manager of Financial systems has been named President of Digimarc Watermarking Solutions. Indraneel Paul, formerly Chief operating Officer of Digimarc ID systems has been promoted to President of that business unit. Carr and Paul report to our President, Paul Gifford. Their biographies were available in our latest proxy.

Restructuring the company into a portfolio of peer level operating units under a corporate umbrella improves our ability to focus the activities of business units, improves the accountability of management to reach out to your business, helps balance investment against the current and anticipated revenues, enhances emphasis on customers satisfaction and facilitates the continuing rapid growth of the company. They'll allow the operating unit to focus on technologies; products and services that has remained as specific customer groups with support from centralized corporate wired (ph) services. Additional operating units can be easily accommodated while required or developed organically. Our financial performance in Q2 reflected ID systems' steady progress on the path established during the past 18 months. So more they acquired up that into a market leader in the global secured personal identification marketplace.

The past year and half has been a period of enormous efforts, change and success at ID systems. The team then has successfully managed the transition about the product Polaroid, working effectively to remedy legacy customer issues, rebate product offerings and fundamentally change in the streamlining overall operations and cost structure resulting business. Less than three years after the acquisition of relevant assets from bankrupt Polaroid corporation, Digimarc ID Systems today is a healthy profitable and market leading provider of personal identity verification solutions to the global market and is poised to effectively compete the growth opportunities both domestically and internationally. The rollout of digital watermarking for enhancing security of driver licenses is under way. New Jersey, Vermont, Michigan and Nebraska have adopted. Many more states are expected to come on board in the near future.

These activities are a part of the key strategic initiatives to propagate digital watermarking benefits first in our driver license customer base and later through licensing in a wide range of secure personal identification documents. Regarding the adoption of watermarking for driver licenses is encouraging as it adds momentum to our successes and counterfeit deference and copyright protection, and the early stages of adoption of watermarking for a variety of other applications across a range of media types. The most mature and substantial deployments of watermarking solutions today are in counterfeit deference with central bank and enhanced online licensing in compliance monitoring for commercial photography. One of our long-standing customers for the commercial photography solution, Cordis, a leading supplier of creative news, historical celebrity and art imagery was widely quoted during the quarter regarding the extraordinary success they have enjoyed in using our watermarking solutions for identifying and montezing unlicensed uses of their imagery.

Regarding emerging markets, we are watching with great interest the initiatives of our licensees in the use of watermarking for television and radio broadcast and Internet monitoring and for forensic tracking of music movies and video computer games. Watermarking base solutions for preventing piracy of movies, to copy prevention of play control mechanisms, continue to be bogged down by resistance from the computer industry and a lack of consensus on business models and a balance of copyrights between artists, distributors and consumers. The DVD CCA process has not resulted in selection of the consensus watermark solution, the DVD copy prevention and play control. We will continue to support this profit as appropriate and work on alternative path to adoption including private company negotiations and policy initiatives. Our long-term prospectus remains encouraging despite these obstacles as general market trends indicating increasing needs for sub-solutions and no effective alternatives to our proprietary technologies. We can afford to be patient while the entertainment industry problems are sorted out. In the meantime, we expect to continue substantial progress in other areas.

Our perfect record of IPM enforcement remains in tact and in May 2003, we settled the infringement lawsuit that we followed against Spectra Systems Corporation during the fourth quarter of 2002. We settled that certain uses of the digital watermarking for documents occurred will infringement our patents. It was settled when the defendant agreed to discontinue the allegedly infringing activities. Steady growth in our intellectual property assets continues and we have 113 US patents containing more than 2000 frames with more than 350 patent applications pending. We are demonstrating the synergies between ID Systems and watermarking solutions. The unifying theme of our business is to provision cost effective security solutions for valuable media contact. We continue to anticipate a profitable year on higher revenues with the best prospects for growth in ID Systems, watermarking solutions for financial institutions and inventory control. Our strategic plan to product services and licensing to government enterprise customers and careful expense management will foster continuing growth in revenues and earnings. We remain committed to increasing shareholder values to diligent entrepreneurial efforts, coupled with rigorous financial and operational discipline. EK will now provide you with details of our guidance for Q3. EK?

The following statements concerning projections of future financial performance are based on current expectations. These statements are forward-looking subject to risks and uncertainties and actual results may differ materially. These statements did not include the potential impact of any investments outside the ordinary course of business or mergers and acquisitions. Continuing uncertainty in global economic conditions makes it particularly difficult to predict the product demand and other related matters. We estimate that third quarter 2003 total revenues will be in the range of $23 million to $24 million. Revenues are highly dependent on a number of factors including but not limited to general economic conditions, the company's ability to predict card issuance volumes from existing state driver license programs, the company's ability to secure new contracts, the political and competitive environment in countries in which the company seeks business, changes in customer order or usage patterns and changes in the demand for the company's products and services. We expect gross margins in the third quarter of 2003 to be in the range of 43% to 46%. Gross margin may be higher or lower than expected due to a number of factors including but not limited to competitive pricing actions, changes in the estimated product cost and changes in the company's estimated revenue mix.

We expect combined operating expenses for research development and engineering and selling, general and administrative of approximately 9.5m to $10.5m in the third quarter of 2003. Operating expenses, particularly certain marketing and compensation related expenses vary depending on the level of revenue and profits. We expect non-cash charges related to the amortization of deferred stock compensation to be approximately $300,000 in the third quarter. These charges relate to options granted to employees in 1999, prior to the company's Initial Public Offering. The company will record the last of these charges in the fourth quarter of 2003. We expect to record a provision for income taxes of approximately $50,000 during third quarter of 2003 that relates to taxes payable in foreign locations. Income Taxes for domestic operations are expected to be zero during the same period due to net operating loss carrying forward benefits that the company has from prior periods. We expect other income consisting mainly of interest incomes to be approximately $150,000 in the third quarter of 2003, assuming no material change in average cash balances or interest rates form the second quarter. Based on the above assumptions, we estimate diluted earnings per share to be in the range of $0.05 to $0.07 for the third quarter of 2003. For the full year 2003, we'll remain comfortable with the first call consensus of $0.19 diluted earnings per share.

Before we conclude, I would like to give you an update on upcoming Investor Relations activities in the third quarter of 2003. On Monday, August 11, we are scheduled to present at the Pacific Crest Technology conference at Sonnenalp Resort, Vail, Colorado at 2:00 pm. During the month of August, we plan to meet with current and prospective investors in New York, Boston, Los Angeles and San Diego. Between September 3rd and September 5th, the exact date and time is unknown at this time. We expect to present at the SG Cowen Technology conference at Marriott Copley Place, Boston. This concludes our presentation. We now welcome your questions.

At this time, I'd like to remind everyone, if you'd like to ask a question press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Chris [Inaudible] of SG Cowen

Congratulations on a good quarter guys.

Thanks Chris.

So, wondering if you could give the breakout of gross margins between watermarking and ID systems?

Chris, the gross margins typically run on the watermarking side in the mid-to-high 50s, and in the ID Systems in the low-to-mid 40s.

Okay, and the sequential increase in gross margin this quarter, was that more due to the ID business or watermarking?

They both actually came in pretty close to what we expected it to come in. ID Systems was a little bit stronger this quarter.

Okay, and then if you have had success on getting states to adopt watermarking, just wondering other than the security and tamper proofing benefits, can you have an idea what applications might be enabled with watermarking on licensing? And then also do you see opportunities for follow on sales for both hardware and software?

There are a lot of applications watermarking for driver licenses Chris, and then we are beginning with a suite of applications focused on deterring counterfeiting and tampering. The after market for hardware and software for applications in general will be significant. The beginning point for applications is focusing on benefits to the DMV themselves, but obviously we could use the covenant (ph) secured machine readable features enabled by watermarking to benefit larger audiences including law enforcement and retail. And so, what you are seeing here is laying down the foundation so to speak, for long-term annuity and for growth in applications beyond the initial applications that has been [Inaudible]. We've identified in prior years and patented from more than a dozen of important applications of watermarking and secure personal identification documents and so we are beginning modestly here and we'll over time and grow both the breadth of the applications and the penetration of the market to build substantial and profitable revenues. We also view the driver license market, where we have considerable distribution as a proving ground to demonstrate these benefits to the larger marketplace of secure personal identification documents and we will openly license suppliers in the other markets, the benefits that we are beginning to provide to the driver license markets. So the revenue potential trends and this specific customer segment that we are beginning with and the applications are broader than the ones we are starting with as well.

Great, could you also comment on the card pricing trends and some of the latest contracts and give us an idea as to how you're pricing watermarking?

Chris, with respect to general pricing, I think the general trend has been higher, but it varies from state to state and it depends on a lot of factors. But I've been very encouraged this year in the contract extension we have done and then in the couple of bids that have happened and on what we speculated will come down the road that the state despite their price budgets are looking to improve the products. They want a good product to secure product and because of this the revenue generating activity for the states for us deserves a little consideration even in the tough times. So I am hopeful that the general trends of the customers will be focusing on high quality solution and certainly the lowest one will get the best price they can, but I don't think that they have the same mindset that they appeared to have early last year where they were looking for us to get the cheapest product they could in and then try to build from there. I think here they may be reversing in to [Inaudible]. With respect to the pricing of watermarking, when we provided to our customers, either customers that we have as legacy or in RFP's, watermarking is typically not priced as a separate feature, that's what is the cost per card and what are the features that will be included and watermarking is included as a standard feature in those circumstances. With respect to customers who are not customers of our full system integration capabilities, though we have developed price list and will be and offering to those customers that have been earlier in the process for us to go into detail and what's in the price list, but we think it's very reasonable price for the initial feature in the betting side of things and a small suite of application for the benefit of DMD. But as I mentioned a moment ago, we expect this exercise we are now engaged in now to lay a foundation for other applications and other customers who will also be paying us and licensed suppliers of hardware and software.

Great, thanks a lot.

Again, if you would like to ask a question, please press the star then the number one on your telephone keypad. The next question comes from Erin Goerke of D.A. Davidson & Company.

Good afternoon. Just following up on that last question, I was wondering if you guys are excluding the watermarking revenues from the driver's license is from ID Systems business. Are you including them in your ID Systems business for licenses on the income statement?

Erin, these revenues would be transport to watermarking through an inter-company transport, so it will be reflected in the watermarking side of the business.

Okay, now we see that in the deferred revenue line right now?

Deferred revenue line includes both the licensing revenues from watermarking as well as the ID Systems contracts, they are all bundled together. We are just beginning to implement the watermarking in driver's licenses, so the revenues are just beginning to come in from there.

Okay, and continue the same with digital watermarking, your revenue was fairly flat Q1 to Q2 with slight growth. I was wondering where those are mostly coming from? Are you seeing new contracts or those renewals with current customers?

The focus of revenues in watermarking solutions come from the work we do with financial institutions and the commercial photography application. Because we have some early contracts in Defense and Intelligence and we have some other early market development activities, there is a little bit of quarter-to-quarter variation, but that doesn't look like a trend. That's inherent in every market development. We expect to see growth in all areas of our business over time. So quarter-to-quarter you'll see some variation.

Okay, great. And then just lastly I was wondering what the cash flow from operations was in the quarter.

For the coming quarter?

For the current quarter that you just referred.

Q2, we generated about a million four of net positive cash flow that is net of money we said cash out flow for capital expenditures, which was about $1.3 million. So if you add that back from an operations stand point, you know, cash flow was about north of $2.5 million.

Great. Thank you very much

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

Hi guys.

Hi Steve.

I was wondering first of all, if you could give us an update on Florida and where they are as far as moving to a new driver license and driver license system?

We found no change in the anticipated schedule, Steve. Since our last call, we believe we'll be able to get a contract done during this quarter and we'll begin delivery of over the course of the next 12 to 15 months.

Okay, and Bruce, quite a discussion over, I guess opportunities internationally on the ID Systems side of the business. Can you give us an update on your progress in that market as well as, I guess, progress on establishing relationship with potential distribution partners to help you penetrate that marketplace?

There is an amazing wealth of opportunity in the international markets, Steve. We have been preparing to compete more aggressively in the international markets and that preparation is embodied in the progress reports that all of you have been receiving over the course of last 18 months. Our first task in preparing for expansion was to build a solid core. And through the efforts of our management and employees at ID Systems, we've made very substantial progress there. So, we have a good solid business base to build from now. And I think it would have been too risky to put pedal to the metal much prior to where we are. But I think we're getting ready to go, and so our marketing in the international sectors has been largely opportunistic. I think you will see it become more systematic as time passes during the next couple of years. And the market opportunity there is just enormous. So, we are doing a great job, I think, of getting ready to go and we're starting to rev up the engine.

Great, and lastly Bruce, on the digital watermarking with drivers license, have you had enquiries from, I guess, states that are not your customers currently?

Paul, have you got any enquiries from non-customer states?

Yes, one or two non-customer states have enquired about the feature and we've made presentations to and we're working with them and the potential with their integrators and suppliers to see if they could be included in our future projects.

Great. Thank you.

Once again, if you would like to ask a question, please press the star and then the number one on your telephone keypad. We'll again pause to compile the queue. The next question comes from Andrew Weiner of Burnham Management (ph)

Hi. Good afternoon guys.

Hi, Andrew.

E.K., I was wondering if maybe you could elaborate on [Inaudible] and your guidance suggests the nice ramp in earnings both in the third and fourth quarter. To what extent is that being driven by seasonal factors versus new contracts or adjusting contracts ramping up? And how should we think about that and may be going in to sort of next year as far as whether that just continue on or go back to some sort of seasonal pattern?

Andrew, it's a lot of factors going to the revenue growth. You'll recall that we have a very diversified customer base and we don't have any customer that's over - we had the last quarter, I think, about 8%, right around 8%. So our growth comes from a number of different sources. We expect continued strength in the card issuance volumes going in to third quarter. We see a lot of nice opportunities in the international side of the business and we will expect to see modest growth on the watermarking side, so it's really a combination of all of these. And as far as seasonality, there is some seasonality in the card issuance side, the second and third quarters typically seems to be a little stronger than the other two quarters.

But then it sounds like there is some downward seasonality in the fourth quarter from card issuance that there is some sort of prior comfort with the year-end numbers that you have to have some watermarking meaningful tick up in the fourth quarter. Is that a fair assumption?

No, it's not Andrews. The seasonality in the UK you are referring to is very modest. So don't factor that much into your calculation. Easter time we have observed some seasonality but it is quite small. And though we expect continuing growth in the business for the foreseeable future and as EK said, it comes from a wide variety of sources and none of them are apparently seasonal.

Our guidance for the year, if you recall, was about somewhere in the $94 million to $100 million for the year and we are still comfortable with that range.

Bruce, may be you could elaborate a little on, you referred to tampering and counterfeiting sort of the initial applications on the first stage. If you would look at may be from a time line, this idea to get some percentage of stage card issuance using this application before you move to the next stage or is it more getting the existing stage comfortable, and are we talking 12 months or we are talking three years before we look at some additional applications?

The pace of the development of the market here is more under our control, and generally speaking we have the strong partnership model. We haven't owned the partner that owns the distribution and so we can substantially implement the pace. So I would say in answer to your question that we will move along with all this speed, which is our first priority is customer satisfaction and making sure that we are delivering effectively to the customers. The revenue opportunity is both towards the initial suite of applications and more generally for follow on software/hardware sales, additional applications and licensing and other segments are all a function of scale. So the number one priority is to effectively enable as many states as possible, as soon as possible. And that is our focus this year. So we have done an excellent job, I think of bringing on four states in the first half of the year here and we expect to bring a substantial number of additional states before the year-end, so that the penetration of water-marking in to the driver's license marketplace by year-end should be quite impressive, that impressive penetration actually drives the support of additional partners that are relevant to generating substantial revenue growth, because it will drawn to the opportunity embodied in that distribution. So that's the way the process will work in some sets of the timing and so the revenue should grow a pace with the distribution and the addition of new applications.

Thank you.

You are welcome.

Again if you would like to ask a question, please press the star then the number one on your telephone keypad. Your next question comes from Jennifer Jordan of Wells Fargo.

Yes, good afternoon gentlemen and I apologize, I have been popping back and forth between two calls. So this may have already been asked earlier. I am curious about the recent comments that Bill Gates had made about looking more sterilely at digital watermarking and if you have any sense of what that might mean for you? And you've [Inaudible] the relationship with Microsoft now house with Macro-vision?

I took at as a good sign, Jennifer. But what I am trying to interpret is ambiguity here. Microsoft, I hope will come to appreciate the tremendous value that watermarking can bring to their business. They got off to a bad start because the motion picture industry in this tried to jam it down their throat. So they had an understandable media of reaction they tried to push back on it, but I think the prompt [Inaudible] reflection and education by us and research by their owner indeed staff they are going to see that this is a very interesting and important technology over the computer industry in general and they can use it to extend their markets. Obviously their revenues have been stagnating and their market is saturated and their customers are pretty much satisfied with what they have they need some new products. They need some new customers; they need some new markets. And watermarking can be a vehicle to give them all these things. We are working very hard to educated them and I think the global community of R&D and watermarking will continue to innovate and experiment the commercialization and that will [Inaudible] on and the result is going to be wonderful, but.

Could you just tell a little bit how you are able to work with them? Is it through the relationship that you have with Macro-vision or is it your R&D people contacting there?

It's generally not through the Macro-vision outside. I don't want to go too much into detail on the things that we do together, but we do have some things we work on together. We do our regular communication and then they are very aware of the watermarking from a wide variety of sources including [Inaudible] and others. I am pretty optimistic they are going to see the latter day; it's going to take a little while. So we certainly have a friendly relationship, we don't have any sense of competition or any necessary impediments to work in flexibility together. So I think we can really help the business and obviously we can help ours. So we continue to seek cooperation with them. I think those statements were significant. That was the first sort of kind remarks he had made and I trust his words. He is a very smart guy.

The last question I have, is there a certain sense of urgency about at what point they need to get some sort of decision or product out there for protecting copyright particularly on DVDs and is there a way [Inaudible], you know if they don't get something they pass the window at some point, they put the sense of that time range.

As I mentioned in my prepared remarks, the industry is still settled on their models, both their architecture and their business models. And I am beginning to think that may be that they got started in the wrong place, that they got started with the notion that watermarking was a means of stopping people from doing things. And I think there is a healthier perspective that has been emerging in the last six months or so, which is that watermarking can help people to do things rather than not do things and that is because it is an inherent persistent universal content identifier. So if you know that the stop (ph) is that is in distribution, you can help people to enjoy them more. And while you are doing that, you can track the distribution of the content. This is akin to what we do in image bridge for commercial photography. And so you can track the content. You can identify abnormal uses and deal with them with lots of mechanisms including technology and law enforcement and marketing. Maybe that's where we are heading there, maybe that's the lesson to be learned and the conflict of the past year is that we need a different skill on the application to make it work rather than a big war about the meaning of copyrights. So I am hopeful that the big companies in the consumer electronics and PC markets will think carefully about architecture and business models can come to a conclusion that they clearly have to get control of the content for there to be an economically viable business model. And the only way to get control is anybody have suggested through our technology. I remain optimistic that we are going to get big deployment and substantial income from that particular application. But, we've had to go through a lot of tumultuous debate in order to start out in the right direction.

Right, thank you

Again, if you would like to ask a question, please press star and then number one on your telephone keypad. The next question comes from Rick Ryan of Feltl Group.

Good afternoon, you mentioned one or two non-customers exploring watermarking. Can you give us a feel for your customers that are exploring that option and also maybe that are looking at the facial recognition option as well?

I don't think it would be appropriate to dispose the identity of the customers that are interested and that would be up to them.

Yes, the quantity rather than the specific.

They are at quite a respectable stage. With respect to biometrics, we have fraud deterrents applications that have been very successful in Colorado. We think, we'll get an additional pick up on that application and so again to [Inaudible] that protocol announce those transactions as they occur. But there is interest and I'm hopeful some more business pretty soon.

The watermarking side would have an interest sooner in the facial over the biometrics as more of a longer timeline?

Well, biometrics was first applied in the fourth quarter of last year. So, it actually got into the market before watermarking. So both of them are active.

Thank you.

There are no further questions at this time. Mr. Davis, are their any closing remarks?

I would like to thank everyone for participating and we appreciate your participation and your questions. Thank you very much.

Thank you very much. Bye now.

This concludes this evening's conference call. You may now disconnect.