Digimarc Corp (DMRC) 2012 Q2 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, Bruce Davis, Chairman and CEO of Digimarc. Mr. Davis, please proceed.

Thank you and good afternoon. Welcome to our conference call. Mike McConnell, our CFO, is with me. On the call today we will review and discuss Q2 2012 financial results; talk about significant business developments; the 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 be making 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 share 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 call. For more information about risk factors that may cause actual results to differ from expectations, please see the Company's filings with the SEC, including our latest Form 10-K.

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

Thanks, Bruce, and good afternoon everyone. Our second quarter 2012 revenue decreased by 4% to $9.1 million from $9.5 million in the second quarter of last year. Our operating income dropped from $2.3 million to $1.9 million reflecting the lower revenues and increased research and development investments.

Net income for the quarter was $1.2 million or $0.17 per diluted share compared to $3.6 million or $0.50 per diluted share in the second quarter of 2011. The [2007-sic] results included a $2.6 million income tax benefit resulting from reversal on a valuation allowance on the Company's deferred tax assets. Except for the $2.6 million tax benefit in 2011 net income in 2012 would have been $0.03 per share higher than the prior year.

The balance sheet remains in excellent shape with approximately $44 million of cash and securities and no debt.

Getting further into Q2 results, the 4% revenue decline was primarily attributable to lower development services to the Nielsen joint ventures which were suspended in the first quarter of 2012. Our gross margin 83%, about one-half point higher than the prior year, reflecting the greater mix of license revenues to the total.

We experienced operating expenses at similar levels to 2011 with increased investments in R&D related to Digimarc Discover and our second wave of Intellectual Property. Operating income came in at 21% of revenues. Income taxes were 38% of pre-tax income. Our operating cash flow mirrored operating income at $1.9 million or 21% of revenues and we purchased 54,000 shares of stock in the quarter at an average price of $25.86.

Our financial performance thus far in 2012 is within the range of our expectations at the start of the year. Finally, I am pleased to note the Board of Directors at Digimarc has declared a cash dividend of $0.11 per share of the Company's common stock with dividends payable on August 24, 2012 to shareholders of record at the close of business as of August 10, 2012.

For further discussion of our business results, our business and financial models and risk and prospects for our business please refer to the form 10-Q for the quarter that we expect to file in the next few days.

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

Thank you, Mike. As usual I would like to take some time to recap where we are in relation to our expectations at the start of the year and give you some insight into our view about how our relative markets are developing and what the implications of these developments are for our strategy.

Here is an update on our strategy execution regarding our key goals and objectives as we shared them with you at the start of the year. First of all, we were seeking to deliver profitable growth. One of the critical elements of this goal was to favorably resolve the Verance litigation which we did in January giving rise to substantial growth in license revenues.

Our government business is up double digits from last year as well. Commercial services revenues are down due to the previous announcement of suspension of operations of our joint venture with Nielsen, which although still a licensee, has also been a customer of ours for Development Services.

Secondly, we sought to continue profitable growth in our government business by delivering excellent quality of service to our Central Bank customers, renewing our long-term contract with them and securing new government business in other areas. We are doing well with our Central Bank customers and we expect a contract renewal with them to be signed before year-end. Shortly after the end of the quarter we closed a contract for a few hundred thousand dollars in a new government business not related to our work with Central Banks. There are several other opportunities still in the pipeline.

Next in line is to lay a foundation for future financial success by doing three things; helping Intellectual Ventures successfully license our IP; growing our second-wave patent portfolio and helping make the Nielsen joint ventures successful.

As to the third aspect of this, we noted in our last call that we suspended operations in the JV's and explained our rationale for the suspension and its financial and strategic implications.

Regarding helping IV successfully license our IP we noted previously that IV has reported that there have been significant license revenues attributable to our por5tfolio during the period from inception in October 2010 through the end of 2011. In addition, we have mutually identified numerous targets where we believe our patents are relevant and are working together on assessing these targets and preparing for license negotiations.

Also in our last call we mentioned we had received the 2011 profit participation part from IV and had some questions regarding the revenues and expenses reported there. Following a series of informal discussions we have begun an audit process with the assistance of an expert professional services firm. Given the importance of this license to our business we believe it is incumbent upon us to conduct additional diligence on the report and gain comfort that we adequately understand the allocations involved before characterizing the financial implications for shareholders.

IV is cooperating with the process. We continue to have healthy and collaborative relationships with Intellectual Ventures and believe there is significant unrecognized market potential for exploiting our patents for mutual benefit.

On the remaining elements for laying the foundation for continuing financial success, we set an objective to advance our R&D agenda of fostering adoption of Digimarc Discover by facilitating quality user experiences and financial and strategic benefits for our clients, and establishing technical feasibility of robust and reliable digital watermarking for mobile identification of music and television that can be included in the platform.

Although revenues are not yet material, trial and adoption of Digimarc Discover has grown significantly since its first commercial release in Q2 of last year. We track reads of watermarks by more than 20 authorized applications around the world and observed that the number of countries there has been some activity has grown from 53 to 110.

The top territories currently are the United States, Australia, The Netherlands, UK, and Israel. The principal applications include magazines, newspapers, books, stamps and marketing materials. There has been an eight-fold increase in the number of reads since last year and we have over 100 paying customers. In the US we are working with eight of the top 100 magazines.

During the quarter we introduced a Print-to-Pin service enabling readers of print publications to Pin images to Pinterest just as they do with website images.

Furthering our R&D agenda we are engaged in joint R&D initiatives with a major network service provider, a Fortune 500 services brand, a radio station group owner and a major barcode equipment and services supplier.

Rounding out the key objectives for the year, as always we promise to continue to provide a learning environment for our employees and hire, train and retain a winning team and we believe we are continuing to do a good job in this important aspect of assuring sustainability of the business.

All of this adds up to good progress towards our vision of enabling pervasive intuitive computing. Mobile is a key enabler of this new computing paradigm. We continue to believe that mobile device sensors will play an increasing role in this new user interface. In particular that seeing and hearing will become routine functions of mobile computing devices.

This, in our view, is the natural successor to first-generation keyword search pioneered by Google. It is important now that the network access has swung heavily toward mobile where typing is done with thumbs usually on virtual keyboards with unruly spell checkers and auto-complete functions guessing what users really meant.

There is another important megatrend running in parallel that has to do with the relationship of brands to their customers. Brand owners in media, packaged goods, services and physical retail have seen their brands cannibalized by digital intermediaries like Apple, Amazon, Google and EBay. They have surrendered customer intimacy, accountability and access to important information about their customers' shopping and consumption characteristics.

Brands with good strategic sensibility are now looking for ways to recover the direct connection to their customers. This recovery revolves around improving integrated marketing, providing consumers with greater flexibility with how, when, where they get products and services and information about those products and services.

Social media channels are increasingly influencing consumer decisions and the shape of media experiences. They need to connect better to these decision support systems and this is obvious. Branded companion applications like Lucky Shopper for Lucky Magazine that provide the connections across perspectives are an increasingly common adaptation to these new consumer models that preserve and potentially enhance the brand relationship with customers and prospects.

For instance, companion apps offer the potential for magazines to keep readers in the brand relationship while measuring and accounting for their interactions, moving users across other content and ad offerings and connecting the print identity to digital identity in a healthy synthesis.

Companion apps for magazines can help publishers standardize the mobile response code chaos in their own pages. Many advertisers now include QR codes on their advertising apart from any other code program the publisher offers. As a result, the reader is often faced with a plethora of mobile response indicators in the pages of publications; watermarks, QR codes, Microsoft tags and augmented reality image recognition calls to action.

In parallel magazines are looking to regain some control over the read experiences that are fragmented across multiple screens and media. Their challenge with companion apps will be to build complementary experiences that create a new second-screen reflex and compel readers to pull out their Smart Phones and then read magazines.

The markets affected by these changes are large and diverse including within the seeing realm things like identification documents, newspapers, magazines, direct mail, catalogs, stamps, sales and marketing material and packaging. These media can be recognized using a variety of techniques including image recognition, fingerprinting, digital watermarking, conventional barcodes, QR codes, tags and other visible symbologies.

The hearing function of the mobile devices applies primarily to television and radio. Popular recognition means include fingerprinting and watermarking. The context in which things are seen and heard by mobile devices includes important clues as to the intent of the user which factors into returning the optimal network services when the media object is recognized.

Generally the most important element in context is location. Location based services are a well established utility in mobile devices but are mostly limited to high level directions to outdoor places. Indoor precision location services are the next frontier.

Physical retail suffers a significant competitive disadvantage versus online retail when it comes to understanding the shopping prospects and customers. This lack of understanding makes it difficult for physical retailers to optimize the shopping experience, to mitigate what is known as the "showroom" effect, where consumers go to physical retail to perform their purchase decisions and then buy online.

Magazine publishers have a similar problem regarding understanding how readers consumer magazines and respond to advertising in them. We have observed a very significant increase in research and development pursuing reliable and precise indoor location, akin to extending common location-based services where GPS is either not available or unreliable. There are many prospective suppliers including well established companies and start-ups.

WiFi is the most common technology base. Many alternative methods including GPS, audio, Bluetooth and various other technologies are being tested. Large players making a play towards this market include Cisco, Google, Microsoft, Motorola, Nokia, Qualcomm and Rimm.

We have acquired a portfolio of two patents and nine applications from Zulu Time in order to enter into this space. These assets are now part of our second-wave portfolio. We are expanding filings and intend to build a significant portfolio of relevant IP in this area of market development with is a natural expansion for the Digimarc Discover platform.

Indoor positioning is a significant emerging market opportunity and it is synergistic with our strategy for developing IP relevant to the growing market for context to where our mobile applications that helps brands strengthen and expand direct relationships with their customers. We believe our priority dates give us an interesting position in the IP landscape for this space.

The next step in our R&D roadmap is establishing technical feasibility of our state-of-the-art audio watermarking. The value of mobile music recognition has been persuasively demonstrated by first-generation service providers like Shazam, Sound Town, Gracenote and Digimarc.

Google recently shifted an operating system update that includes a music recognition widget. This first generation approaches are based on fingerprinting algorithms. We believe that Mobile is the new and enduring storefront for purchasing music and being able to identify the source of the music is important to a sustainable distribution model based on mobile discovery. Fingerprinting cannot deliver this sourced distribution, sometimes referred to in the industry as provenance of the content that consumers routinely encounter with their Smart Phones.

That is where we see watermarking's unique role. We are beginning field tests with some radio stations and with advertisers shortly. If commercial feasibility is established in these trials. and we are optimistic that it will be, we expect to upgrade Digimarc Discover to include this capability as a complement to fingerprint-based music recognition and then begin marketing to artists, media companies and advertisers hopefully later this year.

The next phase of basic R&D is underway and the target is conventional barcodes. We are collaborating with a major barcode supplier on this research. Barcodes were first implemented about 40 years ago. We are pursuing the possibility that watermarks could be a natural successor to these codes. I will save the more extensive discussion of the technical goals, market characteristics, targeting and business models for later discussion.

Our aim is to make sufficient progress during the next 12 months to begin socializing the benefits of watermarking over conventional barcodes with industry leaders next year. Other important R&D that is underway concerns the efficient and effective management of resources in the computing models supporting the seeing-hearing device. Multi-mobile recognition by mobile devices across multiple media types in a variety of contexts requires sophisticated resource management.

We have been working on this area for many years. We refer to this body of work as the Intuitive Computing platform. Our first patent on this work issued recently. We expect a large patent family to develop over the coming years, feeding our second-wave patent portfolio.

The business and financial models are generating superior shareholder returns, focused on single process innovations that support brand recapture across all industries. We are increasingly working with participants in the mobile marketing and supply chain to construct the ecosystem of mobile-centric discovery and commerce. We must demonstrate the vision persuasively and license technology and patent rights and provide services where doing so advances the mission.

Licensing of our first wave and second wave patents, technology and software, and the provision of related services are the means of monetization of these innovations. Our financial performance relies on multiple revenue sources including government programs, royalties from existing long-term licensees, proper participation from the licensing of our first-wave patents by Intellectual Ventures, licensing our second-wave patents, licensing of Discover technology and to provision associated services.

With the expiration of Intellectual Ventures minimal guarantees in the second quarter of 2013 and license payments from Nielsen for its 2009 license in the first-quarter of 2014 we are very focused on nurturing existing sources of revenues while bringing to market innovations that will lead to additional sources of services and license revenues.

In closing, I note that we anticipate excellent financial performance in 2012 with significant growth in revenues, profits and cash flow. We do not anticipate increasing our operating budget to accomplish this. Within these constraints we are devoting a greater share of the budget to R&D and IP development to foster long-term sustainability and growth. We intend these investments to lead to substantial growth in licensable technology and patents in the coming years addressing numerous exciting advances in media identification, management and enhancement.

We have plenty of cash to fund growth, pay dividends and consider acquisitions.

That is it for our prepared remarks. Now we will open the call for questions.

(Operator instructions). You have a question from Walter Schenker of MAZ Partners.

Hello guys. It is a general question and maybe you have answered this before but I didn't know the answer. Now that you have been working with IV for a longer period of time I realize once a year you get the report, you get to look at the report and you get to actually hire people to review the report. But on an interim basis do you get progress reports? Do you get notified if they add a licensee? Do you have some sense as to how they are doing? More than, "Gee, things are going great, bad or indifferent?"

We work with them every day so we have a continuous flow of information in both directions. We don't get any interim financial reports. We only get one report in March of each year. So we have had a stub report just for a couple of months of activity and then one full year so far.

Okay. So if they were to sign a major licensing deal you might be aware of it because of the interface you have on a regular basis but you may not know the specifics of what that might generate or anything else?

That's right, Walter. The practice at IV has been to make public announcements of particularly large licenses. I don't know that they haven't. So when those are announced you see who has been licensed and you can hypothesize what relevance our patents might have to a particular licensee.

We have in our agreement a mechanism for determining participation that is based on the relevance of the patents to the license. That is what we don't know the answer to until we get the report which is what part of what was received that is allocated to us.

Okay. Thanks a lot.

You are welcome.

Your next question comes from Keith Mayer of Singular Research.

Good afternoon, guys. I was wondering if you could talk a little bit about in the financials the service revenues have been a little bit lower than what they have been the past few quarters and you mentioned Nielsen. Is that primarily Nielsen that is driving that?

Keith, this is Mike. The prime driver of that reduction was the joint venture with Nielsen where we suspended operations and there was no revenue in the second quarter. So you are right to pick that up.

Okay. Is that also what is going on with G&A? I noticed G&A is a bit lower than it has been in previous quarters as well.

The G&A dropped. We settled a Verance matter in Q1 so we had a large amount of litigation expenses in Q1 and so that dropped off obviously in Q2 and it was down several hundred thousand dollars. So, pretty much as planned for that.

Is that kind of more indicative of the level we should expect going forward?

From the Verance matter, which I think we ran about $500,000 to $600,000 in the first quarter that is gone. We don't think our overall spending for the year is going to change much on a quarter-to-quarter basis but we may have various initiatives we embark upon. We don't see anything major or material hitting the overall operating expenses.

One balance sheet item. Payables were down. I don't know if that was once again something related to this kind of Nielsen or Verance?

Actually it is quite a bit related to the Verance legal matter. The push was heavy in the quarter so there were a lot of accrued liabilities that all the bills came in right at the end of March. All of those bills were paid but you are right. Also, I think we accrue our audit fee which is heavy in the first quarter and that gets paid in the second quarter. So those types of things occur from time to time.

Fair enough. Finally, on the audit process with Intellectual Ventures, could we get any more color in terms of kind of the time frame of when that would be wrapped up?

This is Bruce. It is hard to tell. This is the first time we have done it obviously and it is a complex report and relationship. We are moving along as quickly as we can. As I said Intellectual Ventures is cooperating but we want to do a thorough job so whatever we end up telling you guys we feel comfortable is reliable information.

Okay. Thanks. I guess I will drop out and see if anybody else has any other questions. That's it for now.

Your next question comes from Paul Sonz of Sonz Partners.

Good afternoon. I have a question, Bruce. I listened to your description of the new direction you are taking with research and development which seems to be involved with adding location in some way or helping people understand consumer preferences in context of location. I wonder if you could explain that a little bit more because to be honest I didn't really understand what you bring to the party.

Okay. I had a lot to say because I wanted to help everyone to understand what we are spending our time doing this year which is a lot of R&D. The discussion about indoor location services was to explain in addition to our second wave patent portfolio with an acquisition of some patents from a company called Zulu Time.

It is not a new direction. It is just a continuation of the elaboration of the platform of the seeing and hearing device. So, the way in which this would play out, for example, would be when someone enters a retail establishment and they have their mobile device with them, one of the things that is not known today is how they traverse the store, how they shop, where they look, what they don't buy, how long they spend looking at things.

Well, if you think about online retail they know all of those things. They capture every click that you do. They know how you shop. For instance, if you shop at Amazon they are always suggesting things to you. Well that is being recognized increasingly as a huge enduring disadvantage of physical retail. So the answer to that would be combining the ability for your mobile device to see what it is looking at and recognize it with knowing how you are moving around the store.

So that is an example of how it is relevant. There are many other examples of how it is relevant but that is one. Does that help?

So, this would be a different technology than the watermarking?

Yes. It is still signal processing. We use a little bit technical ping-back methodology to create a virtual clock in the subnet so when you walk into a space there are a bunch of receivers and transmitters around and they sort of create a little closed network conceptually where the various nodes of the network can then notice that you are moving around by judging what is going on with the signal.

So it is quite consistent with our core competence of signal processing but it is not digital watermarking.

Right. Now does that require stores would have to make a capital investment to have the ability to ping your SmartPhone or whatever?

At this point in time it is still R&D. It hasn't been implemented commercially yet so it is pre-commercial. Our hope is that there would only be a nominal investment required, if any, in order to deliver these services. But it is still too early to tell.

The main point with respect to indoor location is that it is a very hot area in which many companies are investing on many different approaches and the IP issues will get sorted out and we think our inventions may be useful to this field. They are complementary to our other features and our platform.

The other features are obviously a person has to take a positive action. In this case would it be necessary to have people opt in on a conscious basis to be part of this or to allow this to happen?

I think it is a good idea. I don't know if it is necessary but that would be our intention for privacy purposes.

Alright. I ask these questions every quarter. In terms of anything out there that looks interesting on the M&A front? Are there lots of things available now or not?

I wouldn't say there is a great deal of difference in supply or demand in the environment right now. There is always activity going on or things that are brought to our attention or we explore. So it is the status quo I would say in that regard.

Alright. You mentioned that you had a small contract I think of $200,000 or $300,000 from the government that was non-related to the Central Banks. Was this in any way part of that large subcontract that you had from the Defense Department?

No, it was not. It was not a contract we had it is a contract we have. So I am pleased to report something other than zero. So yay. But we still have more opportunities in the funnel and larger opportunities and we are still trying to close them. We finally have some business going which I am happy to report.

Alright. One last question. In terms of the direction of the additional phase two intellectual property, I know that is not the right term, but the second group of patents that you are developing, I remember you also talked about moving on a new methodology or something new in the audio recognition space. I wondered, I know you talked a little bit about that but is there anything more you can say about the additional work you are doing in audio recognition?

Nothing other than to recap again it is a fairly complicated set of ideas today. What we are doing is mobile optimized audio watermarking which we believe is different in many ways from prior audio watermarking that was mainly done for what is called In-line applications, that is applications that don't involve a mobile device speaker picking up the signal and discerning what it is listening to.

The importance of that we believe is that fingerprinting, although doing a competent job of recognition, although not a great job or sort of they are in the 60% to 70% range generally of recognition is what we find from what we have been able to study in the market. But it is good enough.

What they can't do is tell you where you heard it. So if the new way of buying music is to hear something and purchase it immediately then there is no means for the distributor or the marketer to get credit. So that model can't work very well for very long. What we think will happen now that the value of recognizing music has been demonstrated is that the new marketing distribution models will be built and I think they are going to be enduring and in those people will want to get credit and get paid for what they do.

Also have some influence on what happens once the music is recognized. So we can do those two things and you can't do those with fingerprinting.

Right. So that would require that the market would then be new music and new releases where you could embed in the new release a watermark?

No. No, actually it can be used with any music from any distribution source because the encoding would be done by the distribution source. The radio station, okay? So all music, not just new music.

So you get around the problem of it not being originally in it. It could be just once distributed again you can put it in at that level?

That's the idea.

Sweet. Okay. Alright. I am sorry to ask all of these questions but as usual...

Can we let you move back into the queue, Paul, so we can get to some other people?

Absolutely. That was very helpful. Thank you.

The next question comes from the line of Matthew Galinko of Sidoti & Company.

Hey, thanks for taking my question. The first one is a follow-up on Paul's question on the government business you mentioned. Along those lines can we expect a bit of a material uptick in the service line for the September quarter or do you not expect that to be a significant piece of third quarter revenue?

This is Mike. We expect it to generate some revenues from that along with our Central Bank revenue. It is too early to tell if it is higher or lower. It really goes towards our overall goal of capturing some government business here other than the Central Banks and that is good so we will have some revenue during the quarter.

Also, I noticed a couple weeks ago IKEA came out with an app sort of talking about augmented reality or it seemed to be related to watermarking their annual catalog or their catalog. Were you in any way involved in that? I didn't see any branding on it.

No, we weren't. There is a fair amount of confusion. I mentioned the chaos of action codes. Augmented reality is presented in a confusing fashion to the market because there are basically two pieces to it. One is recognizing something and the other is overlaying some graphics in between the mobile device and the object.

So it often appears like a 3D kind of thing, right? The way in which they recognize the object is independent of that experience, the viewer experience. However, all of the augmented reality proposed suppliers today appear to rely on image recognition to do that rather than watermarking or any other technology. They could use watermarking. So we actually don't need to compete with augmented reality but they haven't yet embraced our technology of the triggering mechanism. So it is confusing for everyone.

That helps clear it up, I think. I appreciate that. Last question from me. You talked about there being an eight-fold increase in the number of reads you have tracked with the Digimarc reader. First of all, does that include any branded readers like Sports Illustrated? Secondly, what is that in comparison to? I know last year you released Digimarc Discover probably I think in May or June. I guess apples-to-apples what are we looking at?

The increases appear to be quite significant and I say appear to be because I don't want to be too firm on numbers when there is a lot of trial going on. We are actually just finishing our first year here. What we see is many-fold increases in reads and in downloads. We only track downloads of the branded application, the Digimarc Discover application. There are more than 20 branded applications using our technology. We don't track those downloads so far. So we don't know how many downloads there have been so far total but we know how many reads that have been totaled so the reads I am talking about are the reads by all of the applications.

Okay. Perfect. Alright, that's all I've got. Thanks, guys.

Your next question comes from Adam Fisher of Samjo.

A couple of questions. You talked about a bunch of new initiatives, a bunch of places where we are making investments and where we have some partners and you talked about a radio station, network service provider. Can you talk on a couple of different axis about the size, how you are prioritizing them in terms of the size of the opportunities in terms of the investments you are making and maybe the partners are making with us? And in terms of kind of the timing of when you expect both product releases or IP releases and/or revenue over the next couple of years?

Pretty tough to do. I understand what you are looking for. Again, we don't give financial guidance but I mentioned a few different partnerships that we have going. They are all early in the stage so we don't quite know how they will play out.

As you know our business model there are many ways in which the revenues can be generated and recognized. So we are not in a position to forecast the outcomes. We think all of them provide significant financial opportunities so I will try to characterize things a bit in terms of what I listed in my prepared remarks.

In terms of major network service provider what we would get there is distribution, alright? That would help a great deal in our value proposition with everybody that we work with. So that would have a multiplier effect on everything we do because we would have much larger distribution than we do today via our downloaded app.

In terms of the reference to a Fortune 500 services brand we are trying to work with them to build an industry solution for the industry that they happen to be in, which if we were successful we would then market to everyone else in that line of business but we would also lay a foundation for our work in the barcode area in that we would be working on integrated marketing and the integrated marketing would be not only print the materials outside of magazines, newspapers and so forth, but also audio.

Both audio for television and audio for radio. What we are doing with them is collaborating to try to demonstrate the entire platform. That is the seeing/hearing device facilitating customer acquisition and satisfaction across the entire range of their offerings.

I mentioned a radio station group owner, not a radio station, so we are actually working with a group and what we are doing there is doing the commercial feasibility study for the audio watermarking work we have been doing for the last year and a half or so. So we are at the final stage of R&D to determine the commercial viability of our work and that should be fielded quite soon.

Then the last relationship I mentioned was with the barcode equipment and services supplier and there, as you know from prior conversations, we are not messing around with small ideas. We are hypothesizing that we might be able to provide a superior transaction processing methodology to the state-of-the art conventional barcode. If we pull that off it would be enormous but that will not happen in the next number of quarters.

In addition to the improvement in transaction processing we have all the other stuff you might be expecting us to talk about which is the marketing advantages, both pre and post, using digital watermarking versus digital barcodes in the private data channels for brands and so forth. What we have been observing is really consistent with our strategy and reinforces our confidence is that for awhile here I will call the legacy brands hadn't quite understood the impact that the digital intermediaries were having.

Apple has demonstrated very well to them how they can be disenfranchised from the music business but now we are seeing Amazon becoming increasingly aggressive, Google moving more into helping people find things they might want to buy, and EBay and others taking more customer relationship aspects away from the brands and the brands are getting very frustrated about it and justifiably so because it is going to hurt their ability in maintaining their margins if they don't have that kind of brand relationship they had historically.

In conjunction with that, all of the legacy brands recognize why the digital intermediaries have been taking business from them, which is that they have a better understanding of their customers. So they are trying to figure out how to emulate online offline and that is where I think both our seeing/hearing aspects of our platform and location-based services for indoor are important elements of beginning to develop analytics that help the physical retailers and the packaged goods and all the others who want to reduce the power of the digital intermediaries to have an ability to try to do that.

So it is a very exciting time in the market right now and seems to be coming together in a way that there are a number of supporting elements to this technologies should be relevant for.

Can you just talk again about how you are prioritizing the initiatives internally? How you are allocating the R&D resources? How you are allocating your time and the time to pursue the opportunities?

I can give a shot at that. It is not something where there is a consistent daily, weekly or monthly allocation. As you might imagine things ebb and flow. We first focused a number of years ago on two things, back in 2008 after the sale of ID Systems.

We wanted to get our print to web technology improved and we have done a marvelous job with that. It is really excellent now. I think everyone agrees. It performs very well. In parallel we began laying down the general foundation for the platform into which that would fit. That we call the Intuitive Computing Platform.

We just got our first issuance a short time ago on a patent related to that and the Intuitive Computing Platform work was about resource management assuming that there wasn't a single way to see or single way to hear and that seeing and hearing would be used in conjunction with sensor data and other user data, device data, network data and location data how you manage resources in a resource-constrained environment.

So it is very important work on an efficient platform design. So we started work on one element of the platform and then started work on the general foundation of the platform several years ago. All of that building on the work of the last 15 years.

As we study the existing audio watermarking technologies we determined that none of them seemed to perform to the standard that we wanted to have for mobile recognition of audio from television and music. So we invested significantly in that over the course of the last year and a half or so. It has been the priority of R&D.

With that work now nearing a point where we can have a commercially feasible offering, many of those resources have shifted over into the barcode work. In parallel to that we acquired resources associated with the location based services, both of which as you can discern apply to physical retail.

We have been augmenting our marketing resources to deal effectively with bringing these things together into an integrated marketing solutions. That is where one of those partners that I alluded to comes into play. So I would say the allocation today depends on the different phases of development of the R&D. So our basic research is in location and barcode replacement.

Our most mature implementations in the print-to-web area. We continue to develop the efficient platform model and actually implement it in addition to continuing to refine our theories about how it should be structured. And we are working on the integration of these things into the system which then tests those assumptions but also brings to bear these new deliverables from R&D.

I hope that is helpful. I can't say it is 20% this and 30% that and so forth.

That is helpful. Thank you. I appreciate it.

This concludes the allotted time for the question and answer session for today's call. I will now turn the floor back over to management for any closing remarks.

Alright. Thanks very much everyone. We appreciate your support. We look forward to giving you an update at the end of this quarter. In the meantime you can trust that we are working very hard on all of the initiatives as I have described and that in our view it is a very interesting and exciting time in the market to be doing this.

Thanks very much.

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