Digimarc Corp (DMRC) 2010 Q1 法說會逐字稿

Good morning, my name is Jasper and I will be your conference operator today. At this time I would like to welcome everyone to the Digimarc Q1 2010 earnings conference call. All lines with been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Mr. Bruce Davis, Chairman and CEO of Digimarc. Please go ahead.

Thank you, Jasper. Good morning, everyone. Welcome to our earnings conference call. Mike McConnell, our CFO, is with me. We are pleased to report the first quarter results issued in the press release this morning. The objectives of the call our to summarize and comment on the results and review market conditions and provide an update on strategy and operations. This webcast will be archived in the investor relations section of our website and we expect to file our 10-Q with the SEC this afternoon providing more details on the financial results.

Please note that during the course of the call we will be making certain forward-looking statements. These statements are subject to many assumptions, risks and uncertainties, and changes in circumstances. Any assumptions we offer about future performance represent a point in time estimate and actual results may differ materially from those expressed or implied by such statements .

We expressly disclaim any obligation to update any forward-looking statements to reflect events or circumstances that may arise after the date of the conference call. 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 the 10-Q we will file later today. And in our earnings release posted on our website this morning. Mike will summarize and comment on the financial results. Following Mike's presentation I will return to discuss the important events and achievements in the quarter and then discuss strategy. And provide an update on execution strategy. And then we will open our call to your questions.

Thanks, Bruce. Good morning, everyone. Thanks for joining us for today's conference call. Revenues for the quarter increased 130% to $10.2 million from $4.4 million, more than doubling the same amount from a year ago. The increase was primarily the result of a $4.5 million payment in connection with the licensing arrangement with Arbitron, completion of certain of our federal government contracts and increased work with our central bank customers. Both our service and license revenues reached record levels on a quarterly basis. Our gross margins 82% compared to 66% in Q1 of 2009. The increase was primarily attributable to increased revenues from our licensees, the most notable being those from Arbitron. Service margins also improved due improved labor utilization. Operating expenses increased 8% to $4.1 million from $3.9 million in the first quarter of 2009.

The increase reflects investments in product development and our IP marketing initiatives. Operating income totaled $4.2 million, more than $5 million better than the operating loss of $1 million in Q1 of 2009 and the improvement reflects both the Arbitron licensing arrangement as well as operating leverage gained from improving resource management. Net income was $3.8 million or $0.51 per share which was an improvement from net loss of $809,000, $0.11 per share in the prior year. Operating cash flow of $5.4 million was achieved during the quarter and reflects the improved operating results and good balance sheet management. We ended the quarter with $47 million in cash, up more than $4 million from the year end.

And we continued to prudently invest in growth including $700,000 in our early stage joint ventures with Nielsen and incremental spending on our IP marketing initiatives to expand our licensing program. For further discussion of these results, our business and financial models and risks and prospects for our business, please refer to the Form 10-Q that we expect to file a little bit later today. We believe that there may be additional upside to be realized during 2010 including entering into significant new business relationships resulting from our IP marketing initiatives. On the flip side, there is a possibility that we may choose to spend above the levels discussed previously to encourage prospective partners to engage if necessary. Bruce will now provide his comments on our outlook and execution of our strategy. Bruce?

Thanks, Mike. Our financial and operational accomplishments during the first quarter represent a solid start to achieving our 2010 operating plan objectives. We continue to believe this should be quite an exciting and rewarding year for the company. On March 29th we entered into the previously announced $4.5 million collaborative patent licensing agreement with Arbitron. We are pleased to have achieved a successful outcome in this matter without litigation. The conclusion of the negotiation allows us to turn our attention to numerous additional patent and software licensing and development services opportunities.

The record Q1 results were driven by the Arbitron agreement which we believe evidences the strength of our patent portfolio and promise of our long-term strategy of leveraging our patents and proprietary technologies and market experience to deliver superior growth and value for our shareholders. We continue to broaden and deepen our patent portfolio and licensable technologies with relevant innovations. Intellectual properties assets continue to grow at a rapid pace. Twenty-one patents issued during the quarter bringing the total patent portfolio count to over 580. We also filed over 30 applications in the quarter, maintaining a pipeline of pending application of more than 420. Three independent patent evaluators, the Patent Board, IEEE Spectrum, and MDB Capital Group published findings during the quarter, all noting the extraordinary quality of our assets and often ranking our portfolio of those of industry leaders many times our size. The Arbitron license and consistent high rankings by experts provide evidence to prospective licensees and investors of the extraordinarily quality of our patents.

Digimarc's commitment to innovation, IP generation, and fair and reasonable licensing practices will lead to continued success in fostering share holder value by building and monetizing valuable long term IP assets. We see opportunities for strong growth in patent license revenues, software license revenues, and development services. We continue to estimate that the range of opportunities is quite large. The largest potential variants in revenues in the margins is in patent dependent licensing which depends on the timing and disposition of numerous marketing initiatives. Any such licenses may involve related development services collaborations and technology licenses. Our development and licensing business model is positioning us nicely for long-term success in relevant product markets, permitting us to benefit from a combination of patent licensing, software licensing, joint ventures, and custom technology development.

We continue to execute on key elements of the strategy including broadening the relevance of patents and licensable technologies through continuing innovation, fostering the success of business partners, developing additional business relationships and joint ventures, and maximizing share holder value by balancing profitable growth with building long-term assets. The extraordinary growth and quality of technology assets at Digimarc is broadening our licensing opportunity pipeline. Notably we have many patent and technology assets to license related to helping mobile devices to better see, hear, understand and respond to the world around them as well as enhancements to next generation media industry work flows. We continue to innovate at all levels of the typical technology stack including basic technologies, applications systems, and processes.

The market studies in connection with licensing and service initiatives are broadening in concert with the expansion of our asset base including near term opportunities previously discussed in areas such as audience measurement, copyright filtering, royalty audits, mobile music discovery and visual search and brand protection. In the areas of brand protection and digital search there were two notable recent developments. One was the AlpVision agreement announced today and the other was the display of the future of pharmaceutical packaging employing our technology by Catalent at Interphex in New York last week.

AlpVision is a great addition to our business partner network. This remarkable young company has built a profitable growth business using digital water marking and related technologies to reduce counterfeiting and gray market sales of packaged goods. Catalent Pharma Solutions is a leading provider of advanced technologies as well as development, manufacturing, and packaging services for the pharmaceutical and biotech industries. It was created on April 2007 when the Black Stone Group acquired the pharmaceutical technology and services segment of Cardinal Health. Catalent has nearly 75 years of experience in serving pharmaceutical and consumer health companies around the globe and nearly 20 years of experience in serving the biotech community.

Our growth strategy has many facets, all organized a coherent vision. To teach computers to see, hear and understand the world around them. Simplifying access to computer technology and contributing to a future of more ubiquitous and intuitive computing. In closing, I would like to thank our partners, clients, and employees for their continued support and commitment to Digimarc's progress toward making this vision a reality. Now, we will open the call to questions. Jasper?

(Operator Instructions). We do have a question in the queue it comes from the line of Bill Gibson.

Hi, Bruce. Actually, mine is just sort of a technical question. I think probably for Mike. And that is from the cash flow statement we see the spending going into the joint venture and then some of that is showing up as an asset on the balance sheet. How do you determine whether or not that is being thrown down a drain pipe and what sticks.

Well, there is a couple of comments on that. What the balance on the balance sheet is primarily all cash sitting in the bank accounts of the two entities. And each entity has a board that directs the overall operations of the two. So it is pretty closely managed.

We are expensing as period expenses the expenditures of those joint venture investments and so what you are seeing is just cash.

Oh, okay. I understand now. And then secondly, you know, if the economy improves and you are in talks with multiple organizations, do you get a sense things are loosening up out there on the licensing front?

You know, we are sort of a bit orthogonal, I think, to the general economic trends as we witnessed during the downturn we didn't turn down very much and so in an upturn I don't know how much correlation there is to the economy. Things are definitely better across the board. We were a bit nervous in early 2009 about some of our commercial business partners and things are getting -- getting more comfortable there. And we are actually, you know, feeling substantially better about the prospects for a number of those partners than we would have felt a year ago.

Good. Thanks, Bruce.

And again, ladies and gentlemen, if you would like to ask a question please press star one. Your next question comes from the line of Andy White. Andy White: Is that me?

Andy, your line is open.

Okay. Thanks. A couple of questions actually. The first is for Mike. Mike, just on kind of your comments around 2010. Is the potential increase in spending, would that come in the form of additional headcount or are you just talking about incremental travel and kind of sales and marketing expenses just to go after those deals?

I think it could be a couple of different areas. Could be headcount particularly in the product areas as we embark upon some of these marketing initiatives. At the same time, it could be including additional litigation expense if we are required to use those types of resources to bring home some of these licensees.

Okay. And any way to give us a quantified range of what significant means and significant new business relationships?

This is Bruce, I will help out on that one. No, not really. You know, given the nature of our business, we have been quite successful at negotiating relationships without resort to litigation. But, you know, we do have one pending litigation with Shazam and we just resolved one with Arbitron and it is very difficult to predict whether those things are going to happen and once they happen where they are they are going to go in the short-term and so that is where most of the potential volatility evolves on the expense side is in the legal expenses. We are actually ramping up some of our R&D because of favorable market conditions and but that is something that we do in a very careful way and of much of it is in the short-term is likely to be on a variable cost basis, a contract basis rather than a fixed cost. So, you know, it is that kind of stuff. It doesn't add up to a huge amount of money but, you know, because of our scale in any given quarter it could be a significant change in the eyes of some.

And then in terms of kind of the structure of new deals, how -- what is going determine, you know, which ones are kind of one-time fees like the Arbitron one appears to be and which ones will be an ongoing royalty of some sort? How do you weigh that trade off and how do you negotiate it?

I look to get the best shareholder return, that is what motivates my perspective on any negotiation. If I can get a risk free all cash payment up front that equals or exceeds the net present value of risk adjusted of a payment stream I'll take it, you know. And a lot of companies prefer that, Frankly, to a time-based stream of costs because they get it all behind them, right. And so it really depends and there are a lot of factors that go into it. It as negotiation so it is not really our decision in many cases. And so with Arbitron we felt it made sense and they did, too, so was an excellent resolution. The money's in the bank.

Okay, thanks.

Yep.

Your next question comes from the line of Kevin Hanahan.

Good morning, Bruce. Congratulations on a great Q1, great profit this quarter mostly due I think to the one-time payment from Arbitron. I had a couple of questions. First one would be on any guidance for 2010 which I heard your answer to the last call to maybe we are not going to get much. But I Figured I would try anyway. I was reading the annual letter and the annual report that you sent out and it said we see good opportunities for growth in both service and license revenue and I think you said that in your prepared remarks on the call, too. So, is there any range of guidance -- and I appreciate it could be a wide range because you said, you know, it would be a wide range of opportunities this year.

Yeah, I appreciate you trying, Kevin. You're right, you're not going to succeed very much. Let me be as responsive as I can be. In looking at the first quarter here obviously license revenues were up significantly. But even excluding Arbitron, license on service revenues were up from last year significantly. And it is in the nature of our business that, you know, we as the answer to the last question went, we will get paid in different ways at different times by different people and we are not trying to smooth anything. We are trying to maximize the profit for our shareholders. And so as we negotiate additional business relationships, there could be substantial variation in the structure of the relationship and substantial variations in the amount of resources necessary to obtain it and then the amount of time necessary to deliver it. When you add all of those dimensions up it is kind of a futile exercise to try to make short-term projections. I could try. I would miss most of the time. In fact, if you looked at Q1, anybody who was trying to guess Q1 would have missed pretty significantly, thankfully we jut performed substantially.

Too low.

But we were 2X probably what people were figuring.

I would say as I have said now for 13 years we are likely to be event driven and likely to grow in step functions and likely to be things like happen in the first quarter, I don't think of that as a one-time event, I think of that as a routine event in the nature of our business as an immature holder of a very large patent estate. 10 years from now, 20 years from now, if we are still adhering to the same business model we might be a bit more predictable if we looked like Qualcomm or Dolby or one of the more mature IP companies. Given the state of development we are at and given the marvelous portfolio we have and talented employees and rapidly changing markets, I would expect there to be a fair amount of volatility on the upside. And again, as you know, we have built a business model here to skew the entropy to the upside. So when we talk about variations we are talking about them generally in the positive sense but it is really difficult to try to characterize them in the short-term.

Okay. Well, thanks for that answer. And I had another question about the digital cinema, I saw the funding, you know, the lending that JPMorgan was going to provide and some equity I think that the movie studios or their organization was going to put in. Have you seen any impact, have you seen any positive revenues on the digital cinemas and did that impact Q1 at all? And that might be more for Mike.

Actually, I can answer that. Yes, yes, and, yes. James Cameron is a benefactor I guess of Digimarc because "Avatar" has gotten the theatrical distribution inspired about capital investment. We are actually seeing quite positive trends in that area. It is good. It is not a huge revenue stream for us but it is a nice one and we expect it to do very well in this environment.

Okay. Thanks a lot, Bruce.

Your next question comes from the line of Paul Sonz.

Good morning.

I have a couple of questions. First is I asked this I think every quarter. One of the options for your cash is acquisitions of interesting technology. What does the market look like for that at present?

Well, there are opportunities around. We haven't found any sufficiently attractive to close on, but we continue to look. We are quite open to that notion. Frankly, we are very busy right now with organic growth and enjoying a great deal of success in our first quarter of the year and so it would have to be quite a remarkable opportunity to cause us to divert resources to non-organic growth here in the short-term.

Okay.

We got a lot going on, a lot of good things are happening in the marketplace and we are -- as you would hope -- quite conscientiously directing our resources to the best opportunities here to try to bring them home.

Good. Second question, on the deal that you just did announce, is there any way we can assess what the potential streams of income are from this?

Yeah, yeah.

Is it more -- is it more --

What I would recommend you do, we also licensed AWT in Hong Kong during the quarter.

Yes.

So what I would recommend to everyone who is interested in detailed study of our businesses to go to the websites of AlpVision and Catalent and AWT and read up on them a bit and make your own assessment on the likely impact they could have on our business. AlpVision is private but they talk now and then about their financial performance. And we have a royalty bearing relationship with them and so we hope that it will continue to be very successful and that we will, in fact, find ways to help them to be more successful. It is quite a nice company, a good group of people, and they are quite adept at technology. They are very, very tech savvy and they have succeeded in a very difficult segment of the packaging market and so we are very pleased to have them in the business relations.

And then Catalent is a big player and they're enthusiastic. The Catalent relationship is more of joint R&D. It's early stage. It's not going to deliver anything in the short-term here but that relationship and the exhibition at Interphex are ahead of my expectations in terms of market development. I had thought that the opportunities that we are working on with them would be a bit further down the road than they appear to be so I'm very excited about that collaboration and about the potential of that collaboration is seeking to exploit. All good things.

AWT is a big company in Hong Kong. Quite sophisticated. And very enthusiastic about the potential for technology to be used in the Asian markets. It was a very good quarter in terms of execution of strategy. We got a lot done, a lot of things fermenting and we brought some money home. I would say it was a very nice quarter from every perspective for us.

Separate question on Shazam. What is the next the known point where things -- where you might have an opportunity to either settle or it moves on?

Well, you and I talked about this in the past. I mentioned in calls that if you want to talk in general ways there are sort of predictable generalizations you can rely upon to some degree. We don't like to negotiate in public. It's not healthy in any respect. And so we don't like to comment on individual situations. In the Shazam case the public records with reveal that the next stage in litigation would be for them to answer our complaint and that is due in June.

Got it. All right. That's good.

Okay.

And then the last thing is that in terms of you have cash on the balance sheet. Any thoughts on you bought some stock back earlier in the not too distant past and I wonder any thoughts of buy backs of stock here?

Yeah, the board -- we had our board meeting yesterday and the board authorized a continuation of the authorization for buy back for another year. And Mike and I are responsible for the management discretion on when and how much to buy. We are pretty tightly constrained by regulation given the relatively small trading volume of the company but we remain open to buying blocks that become available at reasonable prices and to participating in the market to the extent that regulations permit it. So we are still interested in continuing that program and we have board authorization to do it.

Good. Thank you very much. And it sounds like things are going very well so I look forward to seeing the developments later in the year.

Thanks, Paul.

(Operator Instructions). And there are no further questions in the queue.

Okay. We have got an open line, Jasper, on somebody's line. Okay. All right. Thank you, everybody. I appreciate your support and we will talk to you again in a quarter. Goodbye.

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