Digimarc Corp (DMRC) 2011 Q1 法說會逐字稿

Good afternoon, and thank you for participating in today's conference call. Now, I will turn the call over to Chairman and CEO of Digimarc, Mr. Bruce Davis. Sir, please proceed.

Thanks. Good afternoon, everyone, and welcome to our conference call. Mike McConnell, our CFO, is with me. The objectives of this call are to review and discuss first quarter financial results, talk about 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.

Please note that during the course of this call, we will make certain forward-looking statements including those regarding revenue-recognition matters, results of operations, investments, initiatives, and growth strategies. These statements are subject to many assumptions, risks, uncertainties, and changes in circumstances. Any assumptions we offer about 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 conference call . For more information about risk factors that may cause actual results to differ from expectations, please see the company's financial filings with the SEC, including our latest Form 10-K.

Mike will begin by commenting on our financial results. I will then discuss outlook and execution of strategy.

Thanks, Bruce, and good afternoon, everyone. This was our second consecutive profitable quarter and third out of the past five quarters. We also had positive operating cash flow in four out of the last five quarters. We continue to believe that we'll grow our revenues, profitability, and cash flow during the balance of 2011 and maintain a very strong balance sheet currently with more than $30 million in cash and no debt. Continuing with the execution of our strategic operating plan, we made significant investments in growth initiatives, including the marketing of our intellectual property, our joint ventures with Nielsen, development of additional intellectual property, and Digimarc Discover, all centered on our vision of enabling computers, networks, and other digital devices to see, hear, understand, and respond to their surroundings.

Our Q1 2011 financial highlights include revenues of $9.1 million that were 11% lower than the prior year, a period which reflected a one-time payment of $4.5 million for an IP license from Arbitron and about $600,000 of nonlinear service revenues from some of our governmental relationships. In the current quarter, revenues from existing and new customers grew by more than $4 million, including $3 million from our new relationship with Intellectual Ventures. Gross margins of 82% were consistent with prior year results, as our mix of license and service revenues remained relatively constant. Higher operating expenses reflect increased investments in new product initiatives and the unusual litigation costs; an operating profit of $1.4 million, or 15% of revenues; $700,000 capital contribution to our joint ventures with Nielsen, where our share of the net loss was $500,000; and $15.7 million of stock repurchases, the vast majority being related to the acquisition of more than 550,000 shares from one of our early strategic investors.

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

Thanks, Mike.

As I noted in the press release, we got off to a nice start for the year. Our operating performance was in line with our expectations, and we were pleased to be able to negotiate the purchase of a substantial number of shares from Philips in January. The other big news in the quarter was commencement of a beta program for Digimarc Discover, a platform we're building to deliver on our vision of a seeing, hearing mobile device as a cornerstone of pervasive intuitive computing. Since the introduction of the beta program at Mobile World Congress in mid-February, many interesting opportunities have emerged from nearly 800 trial user accounts and direct involvement with numerous newspapers, magazines, brands, and service providers around the world. Several small magazines have started using the platform in public trials. The beta program is scheduled to run until the end of May. It is intended to help us to refine our offering, study demand, and prepare for active marketing in the second half of the year.

Meanwhile, we are beginning outbound marketing to newspaper and magazine industries. Marketing will ramp up throughout Q2 as we prepare for commercial launch. Early adoption by magazines and newspapers will have ancillary marketing benefits, educating and increasing awareness among consumers and advertisers and attracting attention from brands and their agencies. As we are beginning commercialization of Digimarc Discover, we continue extensive research and development of subsequent phases, including basic performance enhancement, broadening and integrating various of means of object recognition, and innovating in higher order task of sensor fusion and inference. During Q2, we plan to reduce music recognition, and 1D barcode and QR code reading, progressing toward the creation of the universal reader that uses various technologies to identify the content consumers want to experience further . As you know, our ultimate goal is to enable mobile devices generally to see, hear, understand, and respond with optimized network services when instructed by users to look or listen.

In other positive news, several major movie studios have initiated early video on demand release with DirecTV, giving consumers earlier access to movies even if they are still being shown in theaters. Digital water-marking has been featured prominently in announcements of the new services as a key element of the security model for this new consumer opportunity. As various news reports indicate, the licensing program of intellectual ventures is heating up. We take this as a good sign. In parallel, our development activities in media and mobile markets continue to teach the value of the portfolio to increasingly large audience.

In the government sector, things are going well, as we expect to enjoy good growth in 2011, both in our international anti-counterfeiting program and the US federal market. It has been quite an interesting day for our Media-Sync joint venture with Nielsen. We announced recently that the Weather Channel has become its second customer, joining ABC, who uses Media-Sync to enhance Grey's Anatomy. There are many signs of transformation of the television viewing experience along the lines we anticipated -- more engaging, more social television paradigm is developing rapidly, with many suppliers jockeying for position. Earlier today, we learned that Yahoo has acquired one of these companies, IntoNow. We also learned that Walker Digital has filed a patent infringement suit against us based on the Media-Sync offering. Having just learned of both of these developments, we don't have much more to add for the time being. Things are obviously heating up. Overall, we're executing well on our strategy and anticipate a very exciting and rewarding year ahead.

In closing, I'd like to thank our partners, clients, employees for their continued support and commitment to Digimarc's progress toward making our vision a reality. Now, we'll open the floor to

(Operator Instructions) Your first question comes from Corey Barrett of Pacific Crest.

Hi, good afternoon. I just wanted to first ask if there was any new developments that you would be able to talk to with regards to the Verance matter?

There is. There was a hearing in Delaware action last week, I believe, about a week ago on Wednesday, and I learned just a few minutes ago that the transcript from that hearing is available on PACER. And for anyone who is not familiar with PACER, it is an internet-based service where you can find legal pleadings or litigation documents.

Okay, perfect. And then, I was hoping you could talk or provide a bit more color on the Discover Beta and just sort of what kind of traction you are getting there? You commented that you are seeing encouraging response, so is there anything you can add there?

As I noted, we've had about 800 trial users sign up on the online services portal, and we have ongoing involvement with a number of publishers and potential service organizations around the world, so there's a ton of stuff going on. It is in fact behaving like a beta, that is, although there's tons of stuff going on, we are not yet charging, and we do not yet have the contracts, and so we are beginning the outbound marketing, and we will be beginning charging June 1. And we're looking forward to a very interesting second half of the year as we begin the commercial rollout. We do have some people paying us right now, but the dollars are pretty small. Among the opportunities, there are a lot of very interesting, very exciting opportunities. I've got to see that can bring them home into contracts, revenue-bearing contracts in the latter half of the year.

Perfect. And then can you quantify the breakdown of your IV-related revenue between the licensing fee, the $36 million licensing fee over three years, and on top of that, what is coming from your 20% share of profits?

Hi, it's Mike. We have about $3 million this quarter from our IV relationship, and about just under $2.8 million came from the license, and the rest came from the services revenue.

And there's no profit participation yet, Corey. None was expected.

Okay, perfect. And then lastly could you just talk about your share repurchase plans for Q2 and the rest of the year?

Yes, we have authorization granted by the board to continue to do buybacks on a discretionary basis, and there's $3 million in the authorization . So we'll continue to monitor the market and determine when and if additional purchases ought to be made

Okay, thank you. That's all I have. Congratulations.

The next question comes from Kevin Hanrahan of KMH Capital Advisors.

Hello, Mike. Hello, Bruce. Thanks for having the call. I wanted to ask about the buyback, following up on what Mr. Barrett was just talking about. Did you repurchase any shares during Q1 aside from the shares you bought back from Philips?

We did. We purchased about 16,000 or 17,000 shares under the buyback program.

Separate from the Philips transaction, which is kind of a negotiated deal?

Right.

Right. So can you tell us how many total dollars you spent in Q1?

We spent spend $15.7 million.

Our share buyback. Okay, that's great. And then I had a question for Bruce about Shazam, if you can give us some update about -- I think the last thing happened there was you were trying to reconcile or settle your differences, so if there's anything you can tell us about that , what is going on with the Shazam

Yes, there is not much more I can give you at this point. We are continuing to figure out what the optimal relationships our in the music discovery business. As you know there a number of firms doing similar things there. We may partner with one or more of them, and in some fashion all of them would be subject to marketing from intellectual ventures in the event that we don't partner with them.

Right.

And so we are still in that stage of trying to figure out what makes sense.

Would you say that -- is Digimarc negotiating with Shazam trying to come to a settlement, or would IV be taking the lead on that?

IV now has the license rights necessary, in our view, for Shazam.

For those marketing opportunities.

What our role in the mix here besides providing advice and assistance to intellectual ventures is trying to determine if something more than a simple license agreement makes sense with one or more of the companies in the space.

Okay. Thanks so much, Bruce.

You bet .

Your next question comes from Paul Sonz of Paul D. Sonz Partners.

Good afternoon. I had three questions. One is, Bruce, did you talk about -- did you say earlier on in this call that you are going to introduce a music recognition program?

I did. That would imply some progress in what I was just talking about with Kevin.

Okay. All right. And so I assume that that's all you're going to have to say about? We'll just wait to hear, wait for future events to be disclosed or something?

That's right. Yes.

Okay. You also said something in your succinct style about that you are putting together a program that is going to merge various types of identification programs, which would be barcode and other different ways of identifying things. Could you say little bit more about that?

Sure. Our vision and strategy for Digimarc Discover is that the reader application of the software that goes in the mobile device will take advantage of all the various ways that have been developed and continue to be developed to identify objects in -- I call them objects in scenes, but images and sounds. And so we are adding music recognition and barcode and QR code reading in Q2 to the platform so that the consumer experience is optimized. We believe water-marking is a very important means of identifying such objects, but not the only means. And in some circumstances, alternatives may be helpful, and so we are integrating the alternative means of the recognition into the platform.

You said QR. What is that? Is that the one that's sort of looks like a Rorschach ink block test?

That's the one.

That's the one. Okay. And then you talked about that Yahoo just this morning bought someone, a company. And how does that relate to Digimarc?

They bought a company called IntoNow, and IntoNow has developed the means to recognize television programs by generating and matching fingerprints of the audio stream for the television programs.

And that would fall--

So the MediaSync realm of things.

Do you have a relationship with that company already?

They are a competitor.

I see. They are a competitor. And so would you view this as good news or bad news.

I view it as good news and in a number of ways. One is that it is obvious that Yahoo think that this has the potential to be something quite big, rumor has it they paid a fancy sum for a brand-new startup, and, as you know, we have been working on this for quite a long time. We believe that we, meaning us and Intellectual Ventures, may have relevant IP, so the more the merrier. Getting the big companies involved, we think is generally strategically a good thing for us. It is inspirational, because of the obvious competitive capability that Yahoo has, so it is going to cause us to make sure that we are making our best efforts at all times in the MediaSync joint venture. And I don't know how this all plays out in the end, but I think that we and our technology and our IP end up in the endgame, whatever that may be. But it is encouraging to see the investment going into the category and the increasing scale of the participants.

In terms of the way that they accomplish the interaction with the television, is that separate from the way that you do it, or is there a potential for an intellectual property dispute here?

I am not going to try to characterize any infringement risk here on the phone. That's work we do in private and present to appropriate potential licensees as the case may be.

Okay. One last question, you talked about growth in revenue from government, and you talked about federal. And I didn't know whether that would include whether stuff would be Department of Defense or whether that was separate?

Yes, as you know, I don't like to try to forecast this area of the business very much, because it is too difficult to do that, but it does a look like we are going to get some business out of that area. And so we may have some good news to report a little later on. But again is it is subject to all my usual caveats on the federal business.

Well, good, excellent. It's very encouraging to hear progress on so many fronts. Thank you very much.

You're welcome, Paul.

(Operator Instructions) You have a question from Bill Gibson of Anderson Strudwick.

Hi, Bruce. You went over that Yahoo acquisition and then the lawsuit real quick. What was the lawsuit that followed the acquisition?

Yes, I went over them real quick, because I just learned about them. So I'm basically telling you what I know. There's a company called Walker Digital. And its founder is Jay Walker, who was the founder of Priceline. And Walker Digital is in the innovation business. They are a bit like us in their basic business approach, and they allege that the MediaSync platform or some attributes of it infringe on a patent that they own. So they sued us for patent infringement.

Okay, thank you.

(Operator Instructions) Your question comes from and your one of Burnham.

Bruce, I just want to clarify something. I realize you haven't a full chance on the suit. Did they sue the joint venture or did they sue Digimarc itself?

They sued everybody. They sued Digimarc, Nielsen, Disney, the Weather Channel, Apple and the two joint ventures.

Okay. And do you have any more color on the nature of the patent claims? Is it around content and edification or is that business process?

Well, the complaint's available on PACER, I believe. I just got it a couple of hours ago. And like I say it alleges infringement of one patent. I won't try to characterize what the patent says, because that would be inappropriate, given we are in litigation. But you can read it, you can easily find the patent once you get the complaint and take a look at it.

Secondly, Mike, you made a comment in your prepared remarks that if you were to exclude the one-time payment from Arbitron as well as some unusually high level of service activity around the Central Bank contract that existing site of ongoing revenue streams increased $4 million year-over-year?

That's correct.

I assume that is a number that is net of whatever reduction we received from Varence?

Actually, Varence is a 10% customer this quarter, so Varence had an increase over the prior year.

Okay. And is that still based upon them paying what they feel is the right number?

That is their calculation of (inaudible), yes.

Yes, Andrew, I can help little bit on this one. The number we are reporting is actual cash received from those guys.

Okay. The next question I had was, if you could talk a little bit more about your sort of intuitive computing efforts, when you talk about Digimarc Discover per se, I know our focus has been on the publishers. However, what we are doing very much overlaps with some of the large search engine providers and a variety of other mobile commerce advertising and marketing players. Is Intellectual Ventures pursuing strategic relationships of that nature and we are looking to go only directly to publishers per se, or are we involved at all in trying to accelerate adoption of our technology across a broader range of channels .

We are involved across the board. Intellectual Ventures is, as I noticed, generally appears to be ramping up their licensing work, which is a good thing. And we understand that they are out actively marketing our portfolio, and we are helping them wherever we can. And we are also trying to increasingly demonstrate the value of our technology across the range of markets that we target, which helps them indirectly. And then their work hopefully helps us indirectly by providing awareness and, where appropriate, freedom to operate for some of the potential implementers. So everything seems to be going along fine. It's obvious that there is a lot going on in our general product market area, so I'm very encouraged. I have not lost any enthusiasm at all, It is a pretty complex landscape, and we are navigating our way through it here. But it does seem that our vision of the market is well founded.

And I have seen that as well. I guess what I'm also trying to understand is if you could take an IntoNow, forgetting the actual application, but seems to sort of be this idea of media identification through the use of a fingerprint and then linking it to information via network (inaudible) IP that we have talked about owning and there has been numerous examples of companies not just in the MediaSync-like application but in what I will call Digimarc or more directly in line with Digimarc Discover, Is Intellectual Ventures going to be taking the lead in determining where to pursue legal action or try to enforce their intellectual property? How much to say do we have in that? Were a where are we in that sort of market development, because there seems to be an incredible amount of activity in the businesses being acquired, funded, et cetera around this?

Yes, they have the legal right to exercise discretion. The practice has been, and I expect to continue to be that we collaborate in identifying targets and developing marketing plans. So we are working together on these things. And yes, there is a lot going on.

All right. Thank you.

And also I would also add for everyone's benefit that some of our retained assets, which we believe will mature into issued patents over the next few years, are relevant to this general space as well.

You have a follow-up question from Paul Sonz of Paul Sonz partners.

A question on Varence - I was not aware that they were continuing to make payments. Is there any estimate you can give us as to the difference between what they paid and what you think you should've been paid during the quarter?

No. They're trying to keep pretty tight wraps on everything, just based on the confidentiality provisions of our license.

And so they basically have written you a check and said, this is what we think is fair?

No, they just made their quarterly payment under the license that we have. They alleged that they are continuing to perform, and thus, they are paying what they think they should pay, and we have a disagreement about that. But they continue to pay because they continue to allege they are operating under the license.

I see.

So it was just a quarterly payment, it wasn't any settlement of any kind. It was just the quarterly payment that they felt they should be making.

Yes, I understand. And is that a variable? Does that vary from quarter to quarter depending on what they see from their internal numbers, or is it just a flat rate that they're paying?

It's a royalty.

All right. Thank you very much.

You're welcome.

At this time there no further questions out turn the call back over to Mr. Davis for any closing remarks.

All right. Thanks everyone for dialing up. It looks like it's going to be quite a year. We are working hard and optimistic about our outcomes, so I look forward to talking to you again another quarter and letting you know how we are progressing. Thank you very much.

Thank you this concludes today's conference. You may now disconnect.