Digimarc Corp (DMRC) 2003 Q4 法說會逐字稿

Good afternoon. My name is Derrick, and I'll be your conference facilitator. At this time I would like to welcome everyone to the Q4 2003 earnings conference call. [Operator Instructions] Thank you.

Mr. Davis, you may begin your conference.

Good afternoon. With me today are E.K. Ranjit our CFO and Paul Gifford our President and Chief Operating Officer. We released fourth quarter and year end financial results today. The purpose of this call is provide a summary, an explanation of our audited financial results, update on significant business developments and market conditions, and some comments regarding Q1 04 and full-year 2004 guidance..

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 our press release.

[inaudible] 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. Such forward-looking statements include but are not limited to statements relating to financial guidance for Digimarc's first fiscal quarter of 2004. Statements relating to the effects of certain collective actions to the company's new accounting systems and processes, statements relating to anticipated future contract revenues and the performance of contracts, statements relating to anticipated product and market price, growth and strategy and other statements containing words such as believes, expects, intends, estimates or anticipates, and other words of similar import or statements of management's opinion. These statements are based on management's current reasonable 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 unforeseen difficulties with the company's new accounting systems and processes, unexpected delays in obtaining closing or performing contracts, future changes in product and market plans, growth and strategy, as for [inaudible] changes in economic business, competitive, technological and/or regulatory factors and trends. More detailed information about risk factors that may affect actual results while the company as set forth in filings by Digimarc with the Securities and Exchange Commission, including without limitation Digimarc's Wall Street and Quarterly Report on Form 10-K under item two management discussion and analysis of financial condition and results of operations. Any guidance we offer are a person's a point in time estimate. We expressly disclaim any obligation to advise or update any forward-looking statements, including guidance, in order to reflect events or circumstances that may arise after the date of this conference call. Whether they arise as a result of new information, future events, or otherwise.

Second, a replay of this conference call will be available for later listening at WWW.Digimarc/investor/events.asp or WWW.street events.com for two weeks following this call. Thereafter, the webcast will be archived and available at http://WWW.Digimarc.com./investor/events.asp under the subcategory webcast archive.

We will discuss fourth quarter and full year 2003 financial results.

First, regarding the fourth quarter, on January 20 and 21, we provided preliminary estimates indicating that we expected revenues and earnings to fall short of prior projections. As we reported today, total revenues of $19.1 million for the fourth quarter 2003 were consistent with otherwise guidance. That earnings for the fourth quarter came in lower than the guidance of 3 cents per share at a loss of $70,000 or zero cents for basic and diluted shares. Seven to 10 cents below our original guidance. Reported EPS is below our revised estimate due to unforeseen accounting system conversion issues that surfaced during the conversion process and during our audit.

Let get right to the details of those process problems and what has been done to resolve them. During the last few quarters we've been in the process of converting from our Legacy financial accounting and planning systems to a new corporate wide accounting and financial planning system for all financial manufacturing and operations activities. Going forward we anticipate that this system will greatly enhance coordination of various aspects of accounting financial planning and forecasting. The accounting system overhaul consolidates all financial planning and reporting functions into a single architecture replacing two incompatible Legacy systems and various manual processes. Of for the fourth quarter and full year 2003, the company reported earnings which were lower than the revised guidance released by the company on January 20, 2004 due to the discovery, during the company's closing process and audit, of inventory and accounts payable posting errors related to the company's new accounting systems. The errors which have been identified and corrected led management to overestimate anticipated earnings-per-share for the fourth quarter and full year 2003 in the company's previously released guidance. Prior periods were not affected. Once we discovered these problems we significantly expanded our coursing and audit processes to include a full investigation of the consolidation of all areas impacted by the system conversion. We have taken appropriate steps to correct the problems created by the system migration during the fourth quarter. We believe that the new accounting systems and processes significantly improve its ability into our operations going forward and reduce the risks of such errors. Nevertheless, we plan to take a belt and suspenders approach to financial reporting for the time being. With enhanced checks and balances and focus to senior management attention. This concludes our discussion of the reasons for the difference between the projected diluted earnings-per-share provided in our January conference call and final audited results.

I would now provide a detailed explanation of the income statement results.

Fourth quarter 2003 total revenues of $19.1 million were down $3.2 million or 14% from the prior quarter and down $1.7 million or 8% from the comparable quarter a year ago. For the full year 2003, total revenues were $85.6 million, down $1 million or 1% compared to the $86.6 million reported for the full-year 2002. The reasons for the lower than originally projected revenues were described in our January preliminary release. A short form was mainly in the ID systems area of our business, due primarily with failure to obtain a water identification project in the fourth quarter, a customer-driven delay in certain level activities related to the implementation of New Jersey's new drywall license system and lower than projected domestic driver's license issue volume.

In the digital water marking areas of our business, baseline results from the Bank Note Counterfeit Deterrence project were in line with the expectations based on our contracted backlog. A major bridge revenues were strong and patent licensing revenues grew sequentially during Q4 due to continued growth in the use of water marking for monitoring and forensic tracking for audio and video content and other applications. Q4 2003 gross margin was 46%, 1% lower than last quarter and consistent with our original guidance. Q4 2003 gross margin was 3% better than comparable period a year ago. For the full year 2003, gross margin was 46% compared to 40% for full-year 2002, an improvement of 6% year-over-year.

Operating expenses for the fourth quarter of 2003 were in line with the original expectations at $8.9 million, down 140,000 or 2% from the prior quarter, and down 353,000 or 4% from the fourth quarter of 2002. For the full year 2003, operating expenses were 38.2 million, down 6.2 million or 14% compared to full-year 2002. The expense reductions are a result of our continuing consolidation and streamlining of operations.

During the quarter we reported non-cash expenses of approximately 113,000, related to deferred employee stock options, compensation charges, which was less than the charges taken in the prior quarters. This P&L charge is now fully amortized. Total other income net of approximately 151,000 was in line with our expectations and substantially down from the prior year due to lower interest rates on a lower average cash balance. The provision for income taxes of approximately 50,000 relates to estimated taxes we expect to pay in foreign countries from profitable operations. No provision has been made for U.S. taxes due to offsetting loss carryforward.

The activities discussed above resulted in a net loss of 70,000 for the fourth quarter of 2003, or basic and diluted earnings-per-share of zero cents on 20.06 million weighted average shares. This compares to a net loss of 225,000 or a basic and diluted earnings per loss of 1 cent on 17.57 million weighted average shares in the fourth quarter of 2002 and net income of 1,284,000 or a diluted earnings-per-share of 7 cents on 19.73 million weighted average shares reported in the previous quarter. For the full year 2003, we generated net income of 1.5 million or eight cents per diluted shares compared to a loss of 8.7 million or 50 cents per share for full-year 2002, an improvement of 10.2 million in net income or 58 cents year-over-year.

With regard to the balance sheet, our cash, cash equivalent, restricted cash and short-term investment balances were 78.6 million, up 651,000 from the prior quarter. The net accounts receivable balance was 13.5 million at December 31, 2003, up 400,000 from the prior quarter. Year so was at 63 days, compared to 58 days reported in the fourth quarter of 2003. Inventory net of reserves was 5.7 million, up 600,000 from the 5.1 million reported last quarter. Inventory includes materials to be used in producing ID cards and consumable supplies that we sell directly to our customers. Long-term assets increased from $59.9 million in the third quarter to $60.2 million in the fourth quarter, as a result of program asset additions net of depreciation of assets already in use.

Deferred revenue for the fourth quarter of 2003 has remained relatively flat at 3.2 million compared to 3.1 million reported in the prior quarter as a result of regular amortization of deferred revenue balances offset by additions related to payments we received from our customers. During the fourth quarter of 2003, we had turned into various capital equipment leases and competitive rates to partially finance capital purchases required for new Digimarc program implementations. We intend to continue to lease finance equipment as appropriate, given the current attractive interest rates.

In summary Q4 revenues were in line with our [inaudible] guidance and EPS was 3 cents per diluted share below otherwise guidance due to financial system conversion difficulties. We generated positive cash flow and our DSO was in line with our historical performance.

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

Thank you, E.K.. The fourth revenue shortfall and furious struggles with our accounting system upgrades is an unfortunate final scene for a year in which we delivered extraordinary improvement in financial performance and significant progress in many other aspects of our business. On the financial front our key focus throughout the year was on the bottom line, which improved by $10.2 million or 58 cents per share. Based on the similar level of revenues. Up to the fourth quarter we had logged three consecutive quarters of increasing profits and seven consecutive quarters of improved financial performance. Substantial improvement in earnings, year-to-year resulted from expanding gross margins, mainlining of operations, and effective expense management. Our cash position also improved in 2003, from 53 million to 79 million, as a result of an approximately $24 million equity financing completed in Q3 and positive cash flow from operations. Our strong balance buttresses our [inaudible] property licensing program and gives us flexibility in considering various growth opportunities. This performed well in many respects in 2003, all though revenues were flat, as we are in the pre-revenue recognition phases of a number of major contracts. Gross margins improved significantly from 38% to 44%. With margin improvement, coupled with flat year to year operating expenses, yielded a nice improvement in contribution margin from the business.

Domestic revenues increased from year to year. A lack of overall growth was due to failure to book any large international deals, including the voter identification project which slipped into 2004. In the domestic market we competed effectively gaining extensions and upgrades from a number of customers. We won a competitive bid in Alabama which has previously been a self issued state. In our January update we suffered an offsetting loss in Minnesota in the fourth quarter.

Regarding the previously reported Minnesota loss we had been told by the state that they have cancelled the contracts that they entered into with the other vendor and are going to rebid the contract opportunity. In the interim, they have requested in a we continue to supply Minnesota under an extension to our existing contract.

In another positive development we had been notified by the State of Hawaii that they have cancelled a procurement which we contested that awarded the contract to another vendor instead of Digimarc. We have given the state a six-month extension to our contract while the contract is put out again to bid and issues raised in our protest are resolved.

In foreign markets we ended the year with a major contract within Mexico. The Institute de Federale [inaudible] of Mexico awarded to us a four-year contract to supply voter identification cards, which we anticipate will generate more than $19 million in revenues. Implementation is underway, and the first cards are expected to be produced prior to mid-year. I'm also pleased to report that the voter identification project that we failed to close in Q3 and Q4 was booked in the current quarter. We anticipate that this contract will generate approximately $2.5 million in revenues, the first shipment of $1.8 million has been completed, we anticipate the remaining shipments from this program will be completed in Q1 of 2004.

We recently announced another foreign market win. Road Traffic Safety Director of Latvia awarded a five year digital driver's license contract to Digimarc. We anticipate that that contract will generate approximately $9 million in revenues over its five-year term. The Latvian contract is also noteworthy as the first adoption in Europe of our ID mark digital watermarking base ID security feature following the trend of rapid adoption of ID mark by nine U.S. states. A water marking consists of watermarking solutions mix that we provide directly to customers and intellectual property licensing that enables other companies to provide watermarking solutions to their customers while paying patent license fees to Digimarc. The current Digimarc solutions business consists of an anti-counterfeiting system that we have developed with a consortium of central banks which has, and continues to, account for a majority, substantial majority, of our watermarking solutions revenues, an Image Bridge, an image asset management and tracking application. ID Mark is the latest edition to our water marking solutions Michigan, both the anti-counterfeiting systems and Image Bridge are profitable. Business unit is operating at a loss due to an investment in ID Mark, which has generated nominal revenues, thus far. in early stage market development.

2003 water marking revenues were down a little over $1 million in comparison to the prior year. The decrease in overall revenues was due to lower revenues from our central bank customers who work on the bank note anti-counterfeiting system. Due to confidentiality restrictions surrounding this area of our business it is difficult to provide details as to the lower revenues. But I can say the [inaudible] revenues reflect a completion of certain development activities that were not completely offset by increasing deployment support requirements. We expect bank note anti-counterfeiting system revenues for 2004 to be higher than 2003 and 2002 levels. Image Bridge is a healthy part of our business, revenues have grown every year since 1999. Margins are high, in the range typically reported for software products. 2003 Image Bridge revenues grew at the highest rate ever increasing 95% from 2002. The primary driver of growth was increased enterprise sales. Image Bridge is hitting home as means of tracking and monitoring corporate image assets inside and outside the firewall. In the traditional copyright protection arena, one of our longstanding customers for the commercial photography solution, Corbus, a leading supplier of [inaudible] new historical celebrity and art imagery was widely quoted during the year regarding the extraordinary success they have enjoyed in using Image Bridge for identifying and monetizing unlicensed uses of their imagery. In 2004 we are planning a major technology upgrade for the product to improve robustness and deal more effectively with compression.

ID Mark, our newest water marking solution, provides covert machine readable security, but enables automated cross jurisdictional document authentication and age verification and aids in forensic analysis. We believe that ID Mark will significantly increase the barriers to counterfeiting and tampering with driver's licenses and other identity documents such as voter IDs and social services cards. ID Mark was introduced late in 2002, a rate of adoption during the first year is very encouraging. Nine states have adopt this feature thus far and account for nearly 20% of all driver's licenses issued annually in the United States. Our market development strategy is to provide the feature to large system integrators at a nominal charge to establish the de facto standard and then to monetize the embedded features in a variety after market applications, including border crossings, law enforcement, airport security, point of sales document authentication applications. After successfully proving the model and driver's licenses we intend to license similar embedding in reading applications in the broader secure personal identification document market. We expect to grow from modest revenues in 2004 to significant contribution within the next two to three years.

The licensing of our digital watermarking patents is a critical element of our long-term shareholder value proposition. There are many encouraging signs that our licensing strategy is on track. Greatest near term interest in digital watermarking is in the entertainment field. Digital watermarking is increasingly being employed for tracking and monitoring of music, movies and television programs. Most of the major music labels are using watermarking solutions for forensic tracking of pre-released music. They are getting the tracking solutions directly from us and from our licensees. Motion picture studios have begun following suit. Just last week Technicolor announced that it is providing watermark based tracking as part of increased piracy deterrent measures in the Academy Award premiere program. In the television business three companies have licensed our patents and are deploying monitoring systems to track radio and television programs and advertisement in major media markets around the world. Universal Pictures, a company that we view as a technology leader in the entertainment business, read the tea leaves regarding the increasingly broad use of watermarking and boldly announced in late 2003, that they would watermark all of their television and film content in all channels of distribution. We believe that digital watermarking is an essential ingredient of effective management of entertainment content and of the development of viable economic models for emerging digital distribution strategies. The increasing adoption of watermarking for tracking and monitoring of media content is fueled by general entertainment market developments and digital distribution of music, movies and television programs, as digital distribution grows in prominence, the analog hole looms larger as an obvious Achilles heel in the encryption ERM paradigm. We suspect this is why prominent entertainment industries have been cited recently, as saying in various public forums that plugging the analog hole will top their legislative agenda in 2004.

With obvious need identified and customers demand increasing, we believe that our licensing program may be approaching an inflection point. There has been noticeable pickup interest in licensing our patents, with fresh inquiries from a range of sectors, including -- ranging from semiconductors to device manufacturers, software companies, and telecom service providers.

Certain other market developments bode well for our strategy. The incredible influx of imaging and mobile devices, such as cell phones and PDA's, is inspiring a reprise of Digimarc Media Bridge, a means of linking printed materials -- Internet services that we launched in the heyday of Internet mania in 2000. We turned down the burners on Media Bridge in 2002 after the September of 2001 terrorist attacks severely impacted our marketing budgets and enthusiasm for Internet services tumbled. We believe that a highly supportive change in market dynamics is underway. A number of companies, ranging from start-ups to industry leaders like Intel, Microsoft and NTT, have announced initiatives aimed at using various signaling means including bar codes, radiofrequency identification and digital watermarking to simplify the user interface for mobile device access to Internet services. We are tracking these developments closely, and discussing with Intel and others various business and technical models for turning printed materials into wireless launching point to compelling consumer and business content, including entertainment and mobile commerce, delivered in a mix of e-commerce applications supported by streaming images, audio and video directly to an user's smart camera phone or PDA. Our wireless media bridge application is being showcased at Intel developer forums around the world. It was selected as best new application at the forum at which it was first showcased in September by a panel industry experts. Taken together these developments are engendering increasing internal optimism that our original vision of broad scale of Media Bridge, as a simplified user interface and printed materials to the Internet may be gaining momentum.

On the intellectual property front our portfolio continues to grow. We currently have 141 issued U.S. patents, containing nearly 3,000 claims, with more than 350 patent applications pending in digital water marking, personal identification systems and related technologies. Approximately 35 of the pending applications have been approved under and are awaiting issuance.

In conclusion, for the past two years, we focused on the bottom line and as did most of corporate America. These efforts were successful in leading us to profitability, with our first profitable year behind us we're shifting focus to growing the top line while continuing diligent cost management. As the leader of our company I'm very disappointed by the failure to meet guidance in Q4 and the subsequent uncertainties brought about by problems in our accounting system conversion. We've carefully studied the causes of the problems and we believe we've taken appropriate remedial action. In addition to addressing the specific problems that occurred in the quarter we are very committed to continuing to improve business prophecy across all areas of the business. We see many signs that our basic business strategy is working and continue to believe that the patience of our long-term investors will be rewarded. E.K. will now provide detailed guidance for Q1 2004 supplementing the preliminary guidance that we provided in our last call.

E.K.

The following statements concerning projections for 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 do not include the potential impact of any investments outside the ordinary course of business or mergers and acquisitions.

We are increasing our revenue guidance range for first quarter 2004 to 23 million to 24 million from our previous guidance range of 20 million to 21 million, as a result of our announce our announcement today of booking an international water identification project. We anticipate shipment from this project to be completed in the first quarter of 2004. We are increasing our guidance for full year 2004 revenues to 94 million to 97 million from our previous guidance range of 92 million to 95 million. Revenues are highly dependent on a number of factors, including but not limited to general economic conditions, the company's ability to predict and predict card issuance volumes from existing straight driver license programs, the company's ability to secure new contracts, the particular 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 first quarter of 2004 to be in the range of 38% to 43%. 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 estimated product calls, and changes in the company's estimated revenue mix.

We expect combined operating expenses for research development and engineering and selling and G&A of approximately 9 million to 9.5 million in the first quarter of 2004. Operating expenses, particularly certain marketing and compensation related expenses, vary depending on the level of revenue and profits. We expect to record a provision for income taxes of approximately 50,000 during the first quarter of 2004. 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 carryforward benefits the company has from prior periods. We expect other income, consisting mainly of interest income, to be approximately 175,000 in the first quarter of 2004, assuming no material change in average cash balances or interest rates from the fourth quarter 2003 ending cash balance.

Based on the above assumptions we estimate diluted earnings-per-share to be in range of two cents to four cents for the first quarter of 2004, based on 20.9 million weighted average shares. For the full year 2004, we expect diluted earnings-per-share to be in the range of 30 cents to 35 cents based on 21.35 million weighted average shares.

Before we conclude be I would like to give you an update on upcoming investor relations activities during the month of March. We plan to meet with current and prospective investors in Boston and New York.

This concludes our presentation, we now welcome your questions.

[Operator Instructions]

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Julia Gumly from Morgan Keegan.

Good afternoon,.

Hi, Julia.

I was wondering if you could provide us more information on the gross margins breakdown, by segments? Were both segments gross margins down this quarter?

The gross margins were actually pretty much in line with our original expectations. In our [inaudible] guidance we expected gross margin to go up because of several factors.

First our revenue mix change. In our original guidance we had some revenues, that did not happen in Q4, that had lower gross margin and those revenues went away so our revenue mix was much richer, so in our [inaudible] guidance we expected margins to be higher.

The second factor is that the domestic volumes were significantly lower this quarter and that had two impacts. In one -- both going in different directions. In one case, a lot of the operational expenses, including consumable supplies and all that, we expected to be significantly lower. On the other hand, we have lower revenue base to absorb the fixed cost.

Another item in our [inaudible] guidance that looked optimistic to us was that our company was essentially closed during the holidays, from December 22nd to January 5th. And that has a positive impact on the bottom line.

So there were a number of items that pointed to better gross margins in our [inaudible] guidance. Otherwise the gross margins were pretty much in line with what our historical run rates have been.

Okay. Thank you. And what was the breakdown between sales and marketing versus G&A.

Julia, I do not have that breakout in front of me. I'd be happy to provide that to you.

And going forward for 2004, should we expect fourth quarter to be the weakest again?

There is definitely a seasonality in the fourth quarter and the first quarter of the year. That's when the issuance volumes in the driver license area has been traditionally weak. So, so that is a big factor.

Okay. Thank you very much for the answers.

Thank you.

Your next question comes from Chris Kincaid with SG Cowen.

Yes, your gross margin guidance implies, you know, for Q1 you expect gross margins to be down quarter-on-quarter and you give a pretty wide range of variance. Is this due to uncertainty over the margins on the international voter ID project or are there some other factors at play there?

Chris, it directly relates to the revenue mix. In the first quarter, we have our revenue mix is -- shows the lower gross margins. It has no implications of what happened in Q4 in terms of the issues we ran into there. It's mostly driven by the revenue mix.

Okay. Is it fair to say that the international voter ID project does have lower margins than your domestic ID business?

That's correct.

Okay. And, then on watermarking, revenues were down 17% quarter-on-quarter. I think I heard you say that the central bank revenues were in line, Image Bridge was strong. And patents and licensing revenues were up. So I'm just trying to understand what exactly was down in the quarter. Was it the central bank revenue?

Yeah, the central bank revenue was down. It was not unexpected. It was encompassed within our guidance.

Okay.

We -- we had completed some development activities and as the system matures, there'll be a trade-off between development activities and deployment support and maintenance activities. There'll be continuing development in the foreseeable future so the balance shifts and that can occur in any quarter and vary some in 2004, we were in a -- again it's hard to explain, but we were in a transition in certain activities between development and deployment. And, as we said publicly many times, deployment is going well. As deployment continues to go well and grow, it will offset any reduced development activity. In 2003, in relation to 2002 and 2004, it didn't quite match up.

Okay. So is it fair to say in 2004, you expect the central bank watermarking revenues to be up each quarter sequentially? As the deployment rolls out?

We expect them, Chris, to be up year-over-year on a quarterly basis it will be determined by our customer in terms of what our billable services will be.

Okay.

But it's not a linear function. It depends on what kinds of activities we're engaged in, any given period.

Okay. And then can you say what percent of your watermarking revenues, for the full year, was from the central bank contract?

Chris, we don't break that out. Yeah, it's a confidential agreement and, so we're not permitted by the terms of the agreement to disclose it's financial terms.

Okay. Thank you.

Okay.

Chris, I could say however, that as I mentioned here, it's been the substantial majority of our historical revenue.

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

Good afternoon, Guys, just following up on the bank question. As you look into 2004, Bruce, how much visibility around that increase year-over-year do you actually have at this point?

We have a contract extension that we've agreed to which will last for a number of years going forward from January 1, and associated with that contract extension are certain guaranteed minimums. So we do enjoy fairly good visibility into what the expectation should be over the course of the year.

Okay. And you guys had touched on a couple of states, actually a growing couple of states where the driver's license contracts are up for renegotiation I guess. I was wondering, Bruce, one could you give us an update of where we are with the state of Georgia and what's the next event that we should be looking at there, and as you look at Minnesota and Hawaii, what do you see as being the issues as to why a competitor may have won those states away from you initially and what are the prospects to win those states back? Thanks.

Okay. First regarding Georgia, we are in discovery. Mostly focused on the taking of depositions go at this point in time. Although one of the parties involved in the litigation was hypothesizing an early trial, we don't see any reasonable prospect of that given where the stage of discovery that the dispute is in. And so there's been no trial date set. We don't know one will happen and we don't know if one will happen. We're in the -- early discovery at this point pan and we remain very -- very confident of our position.

With respect to Minnesota and Hawaii, as you can tell from what I told you today, each of those decisions, unfavorable decisions that were made quite some long -- quite some time ago, have resulted in cancellation of procurements and rebids. And so I believe we lost because of problems in the procurement process, not because of any competitive advantage that anyone enjoys. We intend to bid a strong position in both these states when the rebids occur, and we're dedicated to high quality customer service and hope that the states have been gaining an appreciation over the last couple of years of that sensitivity that we have as Digimarc ID systems. And that in some states and I'm not pointing to these two states in particular, but in some states, because of many problems that occurred at Polaroid Corporation, they didn't have a particularly favorable view of Polaroid as a vendor. We are doing our utmost to change that impression and to create a sense of loyalty, that will facilitate retaining and winning customers as we move forward. So in each of Minnesota and Hawaii, we anticipate rebids will occur whenever the state has gotten itself organized to conduct them. Anything else to your question, Steve, that I left out?

Your next question comes from John Frank with Miller Asset Management. Please go ahead.

Hello. Thank you for taking my call. I've a -- there's a draft RFP on the federal business opportunities website for a -- I guess the inclusion of a holographic thread in $100 bank notes and I was wondering if you were aware of this RFP and if might be a piece of business that you're able to bid for.

It's a technology that we don't have. There are, not only specific RFP's like that that show up in Commerce Business Daily, but there's also a regular solicitation from the bureau of engraving and printing for new security features for bank notes.

Right.

And we're quite familiar with all of those opportunities.

Okay.

We don't have any holographic thread.

Fair enough.

In our project.

Secondly, I note Amba is posting a conference later this week. I think where they are going to formally announce the finalization of their next generation DL specs and I was wondering -- as this happens, how's this going to affect your driver's license business going forward?

Well, we probably should talk after the conference, but I can assure that we're very well represented at the conference and we participate in the committees that form those standards, so we're quite knowledgeable about what's going on there, and I don't think they're going to finalize everything at the conference, but they're going to have a day-long session discussing the proposals. And so we'll --

I'd assume you'd be participating in those discussions?

Yes, yes. We have quite a large contingent in Houston this week.

Fair enough. Thank you.

You have a follow-up question at this time from Steve Lidberg with Pacific Crest Securities.

Hi, Bruce. One question I wasn't able to ask is, do you have any visibility on what states are coming up in renewal in 2004, whether they be yours or a competitor's? Thanks.

We don't feel entitled to try to speculate on the options that states enjoy at the expiration of contracts, so we've tried our best to avoid that kind of presumption. What we do know is the state of North Carolina was -- is going out to bid as announced by one of our competitors and confirmed by the state. So that one we're sure will go out and Indiana is in the bid process. They've been in the bid process for more than half a year. So those are the two that we're certain of.

Thanks.

Your next question comes from Bill Frerichs were D. A. Davidson & Co.

[inaudible]

Hello.

I'm a little surprised by the wide range for gross margin for the current quarter since it's almost March 1st and I was wondering what could change between now and the end of the quarter. And secondly, on the last conference call you mentioned the inability to track issuances at the point-of-sale over your retail counters and I was wondering if the accounting revision has -- has some ability to track point of sale. And finally, is the new accounting system encompassed in the lease financing, is that what you said? Or how are you financing that activity?

Let me take the last one first. The new accounting system is internally funded. It's not a lease program.

Okay how much is it costing you?

Well, over $1 million. About a million 1/2 plus range.

Okay, and its in G&A or is it spread out?

It's spread out. It's amortized over five years.

Very good, okay.

Then regarding the gross margins spread and I'm assuming you are referring to Q1 '04.

Yes, just the Q1 range is pretty broad for a quarter that's two-thirds over.

Yeah, we begin it depends on the revenue mix. What we end up with. So we have a range there. I expect gross margin to come in better than the low end of the range. But we put in the range, you know, because we got some low margin stuff in there. That's, a little, few million dollars worth of low margin stuff so --

And there's business yet to close. Is that what you're saying?

Yeah. The reason for the wide range, Bill, is that there is some business that may or may not close in the quarter that would impact on the margins.

Okay. And the first question is --

Our accounting systems.

Point-of-sale or whatever.

You're talking about what we call the over the counter states, and we have significantly upped our efforts to get timely reports from all our issuance locations. And so our accounting system is not specifically geared to do what you're saying, but other systems are. And so we're getting very timely reports from virtually all of our distribution now in order to provide more reliable forecasting. But that's not an accounting system attribute. The accounting system will help. One aspect of the change would be we now have a fully automated MRP system which is tied into our accounting system and as a result of that we have much better granularity on tracking consumables into those over the counter states on a weekly and monthly basis, so it gives us another way of validating our forecast and issuance rates as we go through the period.

And do you expect the time lapse for the quarterly close to shrink to a more normal level now?

Yeah. This was a year-end, we're closing, Bill, that's why we're so late getting the earnings out. But we will be on a normally quarterly schedule where we'll be releasing earnings in the third or fourth quarter -- third or fourth week after the quarter ran.

Thank you, E.K..

Thanks.

[Operator Instructions] You have no further questions sir, thank you very much everyone.

Okay, thank you very much everyone, good-bye.

Thanks a lot.

That concludes today's Q4 2003 earnings conference call. You may now disconnect.