Digimarc Corp (DMRC) 2009 Q1 法說會逐字稿

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Digimarc first-quarter 2009 results conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions). Mr. Davis, you may begin your conference.

Good morning, and welcome to our conference call. Mike McConnell, our CFO, is with me. We issued a press release earlier today announcing our first-quarter 2009 financial results.

The objectives of this call are to summarize and comment on these results, review significant business developments and market conditions, and provide an update on our strategy and operations. This webcast will be archived in the investor relations section of our website.

Before we proceed, please note that during the course of this call we will be making forward-looking statements regarding management's opinions and expectations about Digimarc's business, its markets, and financial performance. These statements are subject to assumptions, risks, uncertainties, and changes in circumstances. Actual results may vary materially from those expressed or implied by such statements.

For more detailed information about risk factors that may cause actual results to differ from expectations, please see the Company's filings with the SEC, including our Form 10-Q filed on Friday and our earnings release posted on our website earlier today.

During the course of this conference call, we will also refer to certain non-GAAP financial measures as defined by the SEC in Reg G. Definitions of these non-GAAP financial measures and their reconciliations of these measures to their most directly-comparable GAAP financial measures are included in the earnings release for the quarter. Any assumptions we offer about future performance represent a point-in-time estimate.

Given the current economic climate, we believe it is prudent to embrace a very cautious posture towards assumptions and projections in general. We describe various assumptions and projections in this call for the limited purpose of giving you a sense of our planning assumptions and to assist analysts who solicit our views as one of their sources for modeling possible future performance.

It is obviously very challenging for anyone to try to forecast the general economy and, derivatively, its impact on an individual business like ours.

We expressly disclaim any obligation to revise or update any assumptions, projections, or other forward-looking statements to reflect events or circumstances that may arise after the date of this conference call.

Mike will begin this update call by commenting on our financial results. I will then update our financial and product market outlooks, strategy, and operating plans for the remainder of 2009.

Good morning, everyone. I'll begin by reminding everyone of the basis of accounting used in presenting our historical financial results. The digital watermarking business that forms the basis of the current new Digimarc was spun out from Old Digimarc last summer, just prior to the sale of Old Digimarc to L-1 Identity Solutions.

As explained previously on our calls and SEC filings, the basis of accounting used for the digital watermarking business prior to the spin-off, and through August 1, 2008, is referred to as a carve-out of digital watermarking assets, liabilities, and results of operations from the Old Digimarc business that included our ID system operations that were sold to L-1.

It's difficult to meaningfully compare the new to the old financial results, due to the different basis of accounting used in light of the spin-off transaction. Please keep this in mind as we discuss changes in results from our prior periods.

Q1 2009 results of financial highlights included revenues of $4.4 million that were 13% lower a year over year, and primarily reflect some expected changes in the revenue sources per terms of certain long-term contracts, a later-than-expected start of work on our federal defense contracts, and, to a lesser extent, lower royalties from some of our licensees.

Gross margin was 67%, compared to 72% in Q1 2008, with a five-point change due to mix where lower-margin service revenues accounted for a greater part of the total and, to a lesser extent, the impact of the different basis of accounting for expenses that I had mentioned earlier.

Operating expenses increased from $3 million to $3.9 million, primarily reflecting the change in basis of accounting between the two periods.

Our cash investments' balance at March 31 was essentially unchanged at $46 million. The revenue backlog at the end of the quarter was $57 million, reflecting the net impact of newly-booked business and the normal burn-off of backlog.

For further discussion of results, our business and financial models, and risks and prospects of our business, I'll refer you to the Form 10-Q that we filed last Friday, May 1.

Looking forward, we continue to be cautious that our discussion of financial assumptions and the context of the prevailing general economic conditions should continue to be viewed cautiously. With this in mind, we are not revising our prior assumptions in any significant ways. We expect that Q2 revenues and financial results to be better than Q1, assuming that the delayed federal contracts get underway soon.

We are working on a number of interesting opportunities that could impact 2009 financial performance, but the potential impact is too speculative to model at this point. Leaving these opportunities aside, our base plan assumptions are that revenues should grow and earnings improve during the remainder of the year.

We expect that 2009 operating expenses, which include the majority of our $2.3 million of stock compensation, will be less than $15 million. Stock comp expense is allocated between both operating expenses and cost of revenues.

At these baseline levels, and composition of revenues and expenses, we expect gross margin percent for the year to be in the mid-60s; GAAP earnings to show a six-figure loss; adjusted EBITDA, or earnings before interest, taxes, depreciation, amortization, and stock compensation, would be north of $1.5 million. Free cash flow, defined as operating cash flow less capital expenditures, will be positive after taking into account more than $1.3 million of capital expenditures, the majority of which were expected to be related to capitalized patent costs.

The primary explanation for differences between adjusted EBITDA and free cash flow versus GAAP earnings being the $2.8 million of non-cash charges for stock compensation and depreciation.

Bruce will now provide an update about our markets, strategy, and operating plans for 2009 and beyond.

First-quarter revenues were lower than in the comparable quarter of last year, largely due to the impact of arbitrary variations in certain scheduled payments, temporary delays in beginning work on some military and defense contracts, and, to a lesser extent, financial pressures on some of our licensees from the general economic situation. The largest share of the shortfall came from delayed starts on our federal contracts for smart data and weapons security.

We are working on alignment of essential parties and the mechanics of funds flows for these projects, and hope to get underway soon. Continuing delays could dampen Q2 revenues, but at this point we believe we can still achieve our 2009 work plans and budgets for these programs. We'll give you an update on our next call.

Elsewhere, we are executing our strategy generally according to plan, making good progress on our key objectives. As outlined in previous calls, these objectives include successfully repositioning post-spin-off Digimarc end product to financial markets, exceeding our financial goals, providing excellent quality of service to the essential banks and Nielsen, helping our other partners to deal with market challenges and grow their businesses, and entering into additional significant business relationships.

As to the last point concerning growing our business through new and expanded relationships, we are working on a number of potentially significant opportunities, but none are sufficiently definite to discuss yet.

The Board has approved a share repurchase program, authorizing the purchase of up to $5 million of our shares. At current price levels, we believe our stock represents an attractive investment opportunity for the Company. We believe we can continue to invest in the initiatives that are important to our future success, as well as enhance the value of our Company by repurchasing our stock under this program.

Under the program, shares may be repurchased from time to time in open-market transactions at prevailing market prices, or in privately-negotiated purchases. The timing and actual number of shares purchased will depend on a variety of factors, such as price, corporate and regulatory requirements, alternative investment opportunities, and other market and economic conditions.

Repurchases under the program will be funded from available working capital. The program may be commenced, suspended, or terminated at any time, or, from time to time, at management's discretion without prior notice.

In closing, we continue to perform in line with a relatively conservative operating plan as we mitigate risks posed by challenges and uncertainties associated with the global recession.

This concludes our prepared remarks. Thank you very much for your interest and support, and we will now take questions.

(Operator Instructions). Bill Gibson, Nollenberger Capital Partners.

One of the things I noticed you didn't mention on the call was the possibility of acquiring additional technologies to add to your core technologies. Is that still something you're exploring?

It is. As I've said on previous calls, I think that during the second half of the year, there'll be interesting opportunities presented to us for acquiring technologies or operating assets. I'm sticking with that view.

I think we are still heading downward on pricing. And, obviously, we never control the timing of opportunities. They come when they come. But I think there will be opportunities, but I don't know whether it will make sense to take advantage of them or not. But we are certainly open to considering them.

And then, one last semi-related question. I noticed in the 10-Q on the R&D spending, you mentioned digital fingerprinting, other identification technologies. Is that just exploring what may fit or what the competition is doing? What are you doing on that front?

We have been generalizing our R&D for many years now. So that our content identification means include a portfolio of technologies, including fingerprinting. So we actually have fingerprinting IT and a growing amount of it.

And we see that, in certain kinds of applications, [um not] fingerprinting can do an adequate job of identification at a gross level, and that in other applications, the combination of fingerprinting and watermarking will yield an optimal result. And we, at this point in time, are still keeping a very close eye in R&D and marketing on that technology, and there are many unknowns.

Watermarking is a much better understood content identification technology. So what you are seeing there is both work on development of technology and the assessment of technology.

Thanks, Bruce. I'll get back in queue.

Andy Hargreaves, Pacific Crest Securities.

You just alluded to it, I think, but I was going to ask on the R&D, are there -- is it -- is some of the increase almost like contracted R&D that's specific to clients or specific to some of these opportunities that you're going after? Or is it more general stuff that you guys are just interested in?

Mike, would you like to take that one?

Sure. We've got a little bit of a couple things. One is, there have been added headcount that we talked about in prior calls, that we had increased our headcount by about 10%, all of it in the engineering area. And that was to address both increased volume of service work, where they're billed out.

And also, to enhance and explore existing and new opportunities.

And then, on some of these new opportunities, can you give us any sense for what industries they are in or what type of opportunities they are? Is it similar to works that you are already doing, or is there anything that would be, maybe, a new application of the technology?

There are an increasing number of projects that we are working on. You will see our R&D spending higher going forward because of the hiring that we have done. We have added 10 -- about 10 people to the Company this year. All engineers.

And we added them to work on expanded scope of some projects, but also to work on new projects. In particular, we have the two federal contracts, where the work has been delayed a bit. The weapon security project is brand-new. And so, those are the areas where the greatest concentration of new resources are applied.

Thanks.

Walter Schenker, Titan Capital Management LLC.

You made reference in your comments about a number of opportunities which could impact results for 2009, without delineating the magnitude of what the opportunities may be. Can you give us at least some color as to what areas they might be in, aside from saying watermarking?

That's hard to do, where things are just not ripe. But -- I'll try to be a little more indicative here.

The opportunities are primarily in the content identification space, in the commercial area, rather than additional government work. We have a substantial amount of new government work this year, and so, we are concentrating our efforts on building new opportunities in the commercial space. So commercial content identification would be a little more precise.

And since you -- questions beget questions, new government work is outside of the currency areas?

Yes. In fact, we've announced two new -- one continuing program and one new program outside the currency areas. The continuing program is called smart data, and that is a development activity intended to improve the reliability of battlefield intelligence being generated by UAVs.

And the second project, which is brand new this year, is called weapons security, and it's a confidential project that we can't say a whole lot more about. But we are involved in enhancing the security for high-value military installations.

And in the commercial area, I should take that to mean it would be -- I shouldn't take anything to mean, that's why I'll ask the question -- it would be largely media-related? Or media, meaning -- (multiple speakers) audio/video type stuff, as opposed to print.

No, actually the opportunities that we are looking at span all of our range of interest in that area of audio, video, images, and print. And it's a surprisingly interesting fluid environment. As we are looking at opportunities, there's a lot going on in the market in general.

But it's sufficiently volatile, ambiguous, and so forth that I don't want to wind anybody up on what might be able to get done, because I just don't know, given the -- and it's largely -- but given the climate we are in.

The climate creates opportunity, but it creates a lot of volatility. So what looks like an opportunity one day may not be there the next day. Or one that wasn't there today might be there tomorrow, which looks more attractive than the one we are working on.

So there's just -- there are a lot of people who are very vigorously looking for changes in their business models and business opportunities, and that may create opportunities for us.

As we said in our script, and we have said in the last several calls, we have a conservative, well-articulated operating plan this year. We are performing well against it, but we have sufficient capital so that we can consider new opportunities, and we are looking carefully at many different opportunities.

And as I say, there is sufficient volatility that, if I was to try to speculate today on something that we were working on that might happen, I might decide tomorrow there's a different and better opportunity.

So we'll just wait until we've got the deal in hand and we'll make the general public announcement, and then we'll be happy to talk about why we are doing what we are doing, and what the consequences of that action are. I don't want to speculate too much because of the volatility.

I'll finish up with a comment about what you just said. The Company periodically announces technology changes, partnerships, etc. And one way to find out if they are significant is to call you or Mike.

A second way would be if, in fact -- it would have been sort of a request -- if something is meaningful as it would affect current-year revenues or earnings, in some way indicate it in the text, because I can't figure out, when you make these announcements, which ones mean a lot and which ones don't mean a lot, at least within a reasonable timeframe.

Okay. Thank you. We'll take that suggestion to heart, and we'll be as informative as we can be.

Thanks.

(Operator Instructions). Adam Fisher, Burnham Securities Inc..

Maybe I missed it, so maybe you can give some color around it. Has Nielsen talked about the timeline of the Media Manager project in any greater detail than we've kind of heard up to this point?

No.

I'm sorry, that was no?

Yes. No. No, they haven't, as far as I know.

Okay. On the bank note business, the work we do with the consortium of central banks, you've talked in the past about additional opportunities there. Are we working against some of those, and can you talk a little bit about that?

That's one of the areas of potential expansion, and the issues there are not so much volatility, but the difficulty of predicting in advance when opportunities will mature.

And so, we now are in our 12th year in working with the central banks. We have done a great job there.

We have been -- we've become increasingly known in the security printing marketplace. But it's a very mature market with a relatively small supply-chain and a number of dominant suppliers.

We talk a lot with people in that business about opportunities, but, again, I think it's best to wait until something is solid before talking about what we might be able to get done there. But I do believe there are opportunities in that space.

I don't think there are any, that I am aware of, that would impact on 2009 results. So if anything did come up, it would be longer term.

On the same topic as secure printing, there have been a lot of well-documented leaks from the Obama administration. Is there a potential for us to kind of help them secure those documents so that we can -- they can better secure the information flow?

We could. That's actually an application that we have offered to various entities over the years, both those who are in the document production business and those who create the documents using those tools.

And there's just not sufficient interest, it seems, to drive a broadscale market with reasonable financial return. It's an application we think we could do. We just can't find a noteworthy customer for it.

Okay.

I would love to have the government sign up for that. There are many things in defense and intelligence, national security, that we think we can help on that we are not yet working on.

We're pleased to have some new work here in 2009, but we think it's just scratching the surface of the kind of things that we could do. But with the change in administration, that's -- in fact, I can only speculate at some aspects of our delay because of the way in which the government security markets work.

But the change in administration here has been pretty profound. And so, it will take the Obama administration a while to get their feet on the ground with respect to the management of national security programs, I believe, and so, we'll see how things develop with the administration.

Obviously, all of the attention of Congress has been on the economic crisis, and so they are really not very focused on anything else. And I believe President Obama is probably in the same place.

Good. I appreciate it. Thank you.

(Operator Instructions). There are no further questions at this time.

Thanks, everyone, for joining us on the call today. We'll carry on. Look forward to talking to you at the end of this quarter. I see we've got one more question that's come up. Let's go ahead and take the question.

(Operator Instructions).

Looks like it went away. Thanks, again, and we'll talk to you next quarter.

This concludes today's conference call. You may now disconnect.