Digimarc Corp (DMRC) 2010 Q2 法說會逐字稿

Good morning. My name is Celeste, and I will be your conference operator today. At this time, I would like to welcome everyone to the Digimarc's Second-Quarter 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn today's call over to Mr. Bruce Davis, CEO of Digimarc. Please go ahead, sir.

Thank you, Celeste. Good morning, everyone. Welcome to our quarterly conference call. Mike McConnell, our CFO, is with me.

We're pleased to discuss our second-quarter 2010 results, which were issued in the press release this morning. 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 strategies and operations. This webcast will be archived in the Investor Relations section of our website. We expect to file our 10-Q with the SEC later today, providing more details on the financial results.

Please note during the course of this call, we'll be making certain forward-looking statements. These statements are subject to many assumptions, risks, uncertainties, and changes in circumstances. And the assumptions we offer of our future performance represent a point in time estimate. Actual results may vary materially from those expressed or implied by such statements.

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 call. For a more detailed information on risk factors that may cause actual results to differ from expectations, please see the Company's filings with the SEC, including the Form 10-Q we'll file later today and our earnings release posted on our website this morning.

Mike will summarize and comment on the financial results for the quarter. Following Mike's presentation, I'll return to discuss some of the important management achievements during the quarter and provide an update on strategy of execution. And then we'll open the call to questions. Mike?

Thanks, Bruce, and good morning everyone. And thanks for joining us to discuss our second-quarter results. Our revenues for the quarter increased 21% to $5.2 million, up from $4.3 million for the same period last year. This increase reflects higher royalties from some of our licensees, as well as higher service revenues from both Nielsen and the Central Banks.

Our gross margin grew to 71% compared to 65% in Q2 of 2009. The increase reflects a mix of higher license revenues to the total, as well as benefits realized from improved operating leverage in providing our services.

Operating expenses increased 13% to $4.1 million, up from $3.6 million in the second quarter of 2009. And the increase reflects investments -- primarily reflects investments in our product development and our IP marketing initiatives.

Our operating loss totaled $400,000, a 50% improvement over the $800,000 loss in Q2 of 2009, and this improvement reflects the benefits of both higher revenues and associated operating leverage. Our net loss was $900,000 or $0.13 per diluted share compared to a net loss of $700,000 or $0.09 per diluted share in Q2 of 2009. $600,000 of the current year loss reflects our share of operating results from our joint venture investments with The Nielsen Company.

Operating cash flow was $500,000 and improved $1 million compared to the second quarter of 2009, due to improved operating results and continued good balance sheet management. We ended the quarter with nearly $47 million in cash and investments, up about $3.8 million from the end of the year.

We continue to prudently invest in our growth strategy, including $700,000 of equity contribution in our early-stage joint ventures with Nielsen and incremental spending on IP marketing initiatives to expand our licensing program.

For a further discussion of these results, our business and financial models, and risk and prospects of our business, I refer you to the Form 10-Q that we'll file a little bit later today.

Bruce will now provide his comments on our outlook and execution strategy. Bruce?

Thanks, Mike. Our financial and operational accomplishments during the second quarter [builds upon] our great start to the year. The 20% plus growth in revenues in Q2 was encouraging. During the quarter, we focused our R&D on improving the discovery capabilities of mobile devices, particularly in visual search. We dismissed our patent infringement against mobile music discovery leader Shazam to provide more time to (inaudible) negotiator resolution can be attained.

AlpVision joined our roster of business partners earlier in the quarter. We continue to invest in our joint ventures with Nielsen. Our patents to date grew by over 20 issued patents, bringing the total portfolio count to over 600 this quarter end. We also filed more than 30 more applications during the quarter, maintaining a pipeline of pending applications of more than 420.

Opportunities for substantial revenue growth are within reach. We are exploring means to facilitate large-scale licensing of our IP and accelerate (inaudible) of our technology in various product markets. While the timing and probability are clearly not easy to predict, we believe that the financial impact from these opportunities could be significant. We will dedicate significant resources to those initiatives.

We are educating on our key elements of our strategy, which includes broadening the relevance of our patents of licenseable technologies through continuing innovation, fostering the success of our business partners, developing additional business relationships and our joint ventures with Nielsen, and maximizing shareholder value on balancing profitable growth and building long-term assets.

Our growth strategy (inaudible) has many facets, all organized around coherent vision (inaudible) 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'd 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'll open the call to questions.

Celeste, are you there?

(Operator Instructions) And our first question comes from the line of the [Bill Gibson].

First up, just a housekeeping question, Mike. Is that $700,000 contribution, is that going to be steady every quarter or does that going to swing around in the future?

It is a fixed amount according to our contract, so that will be consistent quarter-to-quarter.

And was that pretty much split between the two joint ventures or --?

It's variable, so it's something that we can manage with Nielsen.

Yes. Bruce, I know, one last question here on that, on the Nielsen joint ventures. Could you give us just maybe a little more sense of where they stand right now and are you pleased with the progression on them?

I think we're doing fine, Bill. We are still in the early stage, we're a year into these startups. And I think we're making some good progress in interesting market opportunities. We should be able to talk more about a substance of what we're doing later in the year, that's been a pretty consistent refraining from me.

I don't have a reason to change my view at this point. And as those businesses grow, our investment may grow. On the other hand, we and Nielsen are open to adding financial strategic partners if it makes sense, so it could go down, too. So it's a little hard to predict, but as Mike said, for the near term here, we would expect the investment rate to staying pretty similar to what it's been. And then we'll see how things develop from there.

Thanks, Bruce.

(Operator Instructions) Your next question comes from the line of [Walter Schinker with Maze Partners].

It would appear as if you'd only bought a nominal amount of stock in the quarter?

We didn't buy any.

Okay. Well, it's little less than nominal.

Less than nominal. We didn't have an opportunity to, Walter, [do] a number of considerations, not for lack of desire.

Okay. So I shouldn't interpret it as a function of the price of the stock throughout the quarter.

You shouldn't.

Okay. And secondly, I wrote it down, therefore I just want to make sure. For many years now, we've been looking toward a significant change in the actual operating dynamics of the Company in which revenues would really start to accelerate, not that we didn't get some acceleration this quarter.

I am trying to -- you're always very articulate, made a comment I believe, which I may have written down incorrectly about revenue enhancement being my paraphrase, somewhat closer finally than it might have been in the past. Were you basically trying to say we are finally getting reasonably close to seeing some of the -- many -- some or many of the things we've been working on for many years actually turn into revenue?

Yes.

Or if I misinterpreted you?

No, no. You're interpreting me fine. I guess the only -- I'd like to take a little credit for some progress in that last year's revenues were $19 million plus and we're running at $25 million of 12-months rate by now. So we are growing significantly. I'm working on trying to make us grow more significantly. But, yes, we're making good progress on that.

I'm not looking at the 20% growth rate in Q2 only here, and reasonably people can differ by how they want to account for the various income streams that we'll receive, but we also had $10 million first quarter. So it's quite a year so far and we intend to be building on that.

Okay. Again I'm being redundant to making you repeat yourself. As you look at your world, many of these things are getting close to actually and there's a broad range of things we're working on and starting to generate revenues that may not have generated meaningful revenues to this point?

Yes. A number of good things that have been happened in the last couple of years in the market are bearing fruit for us. So the digital cinema requirement of watermarking and the Blu-ray requirement of watermarking are creating growing income for us.

It's not massive right now, but we see good growth in our license streams from those movements by the movie industry. We believe the movie industry is seeing substantial value in our technology, we expect them hopefully to continue to expand our use of the technology.

Then as we talked about many times, the introduction of the smartphone, say, where you want to pick a starting point, but it's exponential growth and it's absorption into the culture in the last couple of years. It is a tipping point for our business in my view is what are waiting for. If you go back to 1999, we were trying [to just live with] cameras as our interface and they never really caught on.

Well, we do not have imaging sensors and audio sensors in everybody's pocket, and first it's an awesome change in the marketplace that we intend to take advantage of. So those are the things that make me enthusiastic about our ability to increase the distribution of our technology and adoption and then with it, of course, the income streams.

Okay. Thanks, Bruce.

You're welcome, Walter.

Your next question comes from the line of Paul Sonz with Paul D. Sonz Partners.

Good morning. I have two questions. The first is, could you give us a split in terms of the increased revenue between what was service revenue and what was royalty?

Are you talking about Q2?

Yes.

Sure. The service -- this is Mike. The service revenue was a little over $300,000 higher and the license revenue was about $600,000 higher.

Great. Second question is, could you give us, in terms of numbers, the opportunities that you are working on now? In other words, what I'm saying, are you working on a few very large opportunities or are you working on 10 various different opportunities at various sizes? Is there anything you can just put a quantitative note on the opportunities that you see in front of you?

Well, I can put a qualitative, quantitative note on there. We're not working on 10 opportunities, we tend to work on a handful or so at any given point in time. You are aware of some, I'll probably disclose some here, we'd not publicly disclose it to some others.

And the range of opportunities is from sort of size that we've been accustomed to up to a very large size. And what we've been trying to do here is, we've met with a number of quite large companies talk about our technology and they seem to like it. And we're trying to figure out how it's a faster adoption and to step the Company up another level from where we've achieved so far.

And that's speculative, may or may not happen in the time frame you want to it to happen. But there's a full range of opportunity here from (inaudible). So the size that would have is a nice incremental effect on our business to the size that would have quite a major effect on our business.

Okay. Because I think you're using a speakerphone, it was a little muddy, and I had a little trouble understanding you. I think that what you said is that you're looking at a handful of opportunities at something less than 10. And that they range in opportunity from incrementally positive to the things that could be very, very substantially positive.

Yes. That's pretty fair.

Okay. All right. Well, thank you very much.

You're welcome.

(Operator Instructions) And your next question comes from the line of [Kevin Horanahan with KMH Capital Advisors].

Good morning, Bruce. I think I heard you say $25 million, which -- that's right in the middle of my guesstimate of your revenues for 2010. Would it be fair to say that you at least think that 2010 will be higher than last year at $19 million?

Yes. I'm quite confident about that. What I said, just to make sure that those on the phone are clear. I wasn't changing my view about giving guidance. I was talking about our 12-month print revenue run rate -- it's around $25 million, but in answer to your question, yes, I'm very confident we're going to grow significantly over 2009.

So the $25 million that you mentioned, you're talking about trailing 12 months, is that what you mean?

Trailing 12 months, yes, you can run the math, but --

Right. Because last quarter was a big quarter, $10 million plus.

Right.

Can you tell us if any of the royalty increase you saw this quarter was due to the digital cinema?

Yes, it was.

Okay.

And we expect that to continue for the foreseeable future, but again -- because we're a licensor, we are back a bit on the front line. So --

Right. Right.

There's been a nice confusion to capital and again we thank James Cameron for his outstanding artistic vision that drove the capital and drives our royalties.

So the 3D helps you all around?

Absolutely, because it convinces the analog theaters that need to go digital.

Okay. I got you. Thanks so much.

You're welcome.

(Operator Instructions) And we have no questions at this time.

All right. Thank you very much, everyone. We'll carry on. Again, we remain quite optimistic about the near-term prospects here and we'll try to bring us some more business on and get the business to another level of growth. Thanks a lot.

Ladies and gentlemen, this concludes today's Digimarc second-quarter 2010 earnings conference call. You may now disconnect.