Digimarc Corp (DMRC) 2013 Q1 法說會逐字稿

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

Thank you. Good afternoon. Welcome to our conference call. Mike McConnell, our CFO is with me. On the call today, we'll review and discuss Q1 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 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 the 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. As we reported a year ago, Q1 operating results last year included an $8 million revenue amount for past-due royalties received from the settlement with Verance. While total revenues in Q1 of 2013 decreased by 40% to $10.2 million from $17 million in 2012, our revenues excluding the Verance settlement increased by 13% year-over-year. And net income for the quarter was $1 million or $0.13 per share on diluted basis.

The balance sheet remains in excellent shape with more than $40 million in cash and securities and no debt. Q1 results included the first full quarter of operations related to our recent acquisition of Attributor. We made significant progress in integrating the Attributor team and its operations into Digimarc.

We also continued to invest in our growth initiatives, including developing and marketing Digimarc Discover, audio and packaging research and development and developing the second wave of patents, all in support of our vision of enabling computers, networks and other digital devices to see, hear, understand and respond to their surroundings.

Looking further into the details of our Q1, 2013 financial results, we see that excluding the $8 million of revenue from Verance, after past-due royalties in 2012, the majority of our year-over-year growth was due to inclusion of the first full quarter's operations of Attributor, along with the increases in other sources that were offset by elimination of revenues from the Nielsen joint ventures that were suspended in the first quarter of 2012.

In the financial statements we've broken out revenues a bit differently than in prior years. We've historically combined license and subscription revenue on our income statement, but given the recent significant increase in subscription revenues due to the Attributor acquisition, we're now representing license revenue and subscription revenue separately.

Our gross margin was 79%, 10 points lower than the prior year, reflecting a greater mix of service revenues to the total, for our Q1 last year included the high margin past-due license royalties from Verance. Operating expenses were $6.5 million, being 6% higher than the prior year, with most of the increase due to the first full quarter of operations of Attributor and continuing investments in developing and marketing Digimarc Discover, audio and packaging, research and development and developing our second wave of patents.

Our operating profit was $1.6 million or 16% of revenues and operating cash flow was $3.4 million or 33% of revenues. In our last call, we indicated that revenues are likely to be lower in 2013, compared to 2012, primarily due to the $8 million of past-due royalty revenues from Verance in Q1 of 2012 and the quarterly license payments from Intellectual Ventures ending in Q2 of 2013, partially offset by expected growth in revenues from the acquisition of Attributor, our new agreement with the Central Banks and increases from other customers and new customers in other areas of our business.

We continue to expect financial results will be below last year's level. Since the last conference call, we decided to increase staffing in R&D, marketing, and intellectual property, beyond the levels contemplated in our annual operating plan to accommodate additional growth opportunities that have arisen since the adoption of the plan.

Our headcount in December of last year, prior to the Attributor acquisition was 107. Taking into account the 19 employees that came with the acquisition, hiring to our annual plan and hiring to accelerating certain investments in R&D, marketing, and intellectual property, we expect permanent staff and consultants to exceed 150 by the end of Q3.

We're allocating these resources, the additional resources to marketing and product development of Digimarc Discover, as we look to expand our offering to larger enterprises and broader markets, particularly in support of the Shoppers Journey, bringing to market our packaging and audio offerings and more dedicated research and associated hardware, software and intellectual property development.

The accelerated investments will reduce profits for 2013 and may lead to a GAAP loss for the year, depending on the timing of revenue ramp. Our operating cash flow is expected to be positive for the year and we've plenty of capital to fund these and other initiatives that we believe will add significant earnings growth potential in the immediate, intermediate and long-term basis.

Our dividend program continues unabated. The Board of Directors has declared a quarterly cash dividend of $0.11 per share of the Company's common stock. The dividend is payable on May 20, 2013 to stockholders of record as of the close of business on May 13, 2013. For further discussions of our financial results and risk and prospects for our business, please see the Form 10-Q that we expect to file very shortly.

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

Thanks, Mike. We delivered considerable increase in shareholder value since the ID System sale in 2008. Enterprise value has increased six-fold in a little over four year since the new Digimarc share has began trading post divestiture. Despite record profits and cash flow, dividends and share repurchases, the share price has been languishing. Long time shareholders have witnessed such periods over the years. Recognition of increases in value in our business have generally been event driven.

There have been several defining moments in our brief 18-year history, including an inquiry from Central Banks in '97 that led to our largest and longest standing customer relationship, the IPO in '99, acquisition of Polaroid's Large Government Programs business in 2001, sale of that business in 2008 and the Intellectual Ventures license in 2010. There are signs that another defining moment may be becoming soon.

Things are moving faster in a number of fronts as favorable mega trends in our target markets accelerate. Interest in our Company and its technologies is growing coincident with these trends. I will explain what I can, when I can, but will ask that you be patient regarding the scope and timing of disclosures that we will be able to make, given confidentiality obligations we have with various companies and good sense regarding managing business relations and competitive considerations.

We intend to present further details on execution of strategy and materials to be posted on our website in mid-May, preceded by a news letter signaling the availability of the materials.

As we've been saying, we are intent on making significant progress on execution of strategy in 2013. The management team is working diligently to demonstrate and communicate progress on a number of fronts described in the Annual Plan Objectives that we've shared with you, as well as some new opportunities that have emerged since approval of the plan by the Board.

It is clear to me that we've entered a phase of significant expansion of the commercialization of our research and development, both directly through the provision of software and services and through licensing. Although we continue to expect that revenues and profits will be lower than last year, we are increasing investment, not cutting costs as some might expect. We do not come to such decision slightly and I can't fully communicate the bases for these decisions at this point, or if I'm confident that this is the best course of action to maximize shareholder value. This is another potential tipping point for Digimarc, reminiscent in some ways of the investment in growth that we made during the 2001, 2008 years that led to dramatic increases in shareholder value that greatly surpassed expectations based on current earnings.

The approach has obvious risks that we believe are justified by the scale of the opportunities we're pursuing.

And I also think that time is of the essence, as certain changes in our target markets are moving at breakneck speed. A sense of urgency pervades our operations this year as we consolidate the fruits of the last 15 years of R&D into a robust software platform and associated services, while generating substantial patent assets from our increased investment in R&D.

We remain on track and committed to most aspects of our previously discussed strategic goals. However, we are contemplating two important changes. We're making a significant change in the strategy for growth in the area previously known as government programs. The bulwark of that area of business will continue to be our Central Bank customers with whom we recently agreed to a 12-year extension of our contract.

As you know, efforts over the years to expand our footprint in government business into defense and intelligence have been unsuccessful. As previously announced, we pulled back on associated business development initiatives. And we have identified in our exploring of potential high growth alternative for product market expansion that leverages many aspects of our work with the Central Banks over the last 15 years and is synergistic with continuing development of Digimarc Discover.

The new direction is based on some homegrown innovations in mobile payments, a market with enormous potential that we think our technology may provoke revolutionary changes in payment processing. We're not ready to provide specifics, but wanted to give everyone a heads up that we're anticipating this change in strategy.

The other strategic change is in the audio field. We had made considerable investments in mobile optimized digital watermarking. The R&D has produced good results. We had anticipated targeting some business development resources of the music industry in 2013. Based on field trials of our technology and certain changes in relative markets, we are pivoting our focus to television and radio advertising and in-store audio networks. We have completed successful technical trials in national television, radio broadcast and in mass merchant stores. The results are sufficiently positive to warrant the reallocation of resources. More to come on this too as the year progresses.

Digimarc Discover is the embodiment of our patented Intuitive Computing Platform. We've made good progress in R&D and commercialization, as noted, for example, in our recently published 2012 Traction Report that chronicles growing adoption of Digimarc Discover in the magazine industry. Usage rates have tripled in the first quarter over the same period a year ago and we've added several new customers, including Cooking Light, Real Simple and the Sharper Image catalog.

Most recently Costco, the nation's second-largest retailer initiated use of our solution in the April issue of their member magazine, The Costco Connection with circulation of over 8 million. The just released May issue has over 130 digitally watermarked objects.

In parallel, Costco added Digimarc's reading capabilities to their popular mobile app. We are in active discussions to expand our relationship with Costco, in accordance with our retail strategy as outlined in previous calls. We intend to invent and deliver directly and through licensing on common platform that connects prospects and customers to brands across the full spectrum of the Shoppers Journey.

The focus of our market development is on mass merchants, expanding the application of Digimarc Discover for magazines and catalogs, to newspaper inserts, direct mail, packaging, in-store promotion and television and radio advertising.

We're making good progress on developing an invisible barcode solution for consumer packaged goods. Our packaging research and development has progressed to collaboration with a major scanner supplier on implementing our software in one of their new imaging scanners. We've begun to get access to scanners from other suppliers to assess implementation opportunities and challenges.

We continue to work with a consulting firm of experts in the scanning industry to apply this learning to market data to develop our models for positioning and packaging, another aspect of preparing for successful market entry.

As most of you know, our long-term goal is to become the successor to conventional barcodes for much of the automatic data capture market, including retail checkout and to deliver the consumers pre and post-purchase benefits of digitally watermarked packaging and shopper marketing materials.

Licensing will continue to be a key element of monetization of our inventions. All these developments that I've described flow into our patented intuitive computing platform architecture. We see pervasive intuitive computing as inevitable, expanding and simplifying access to networks across all aspects of everyday life. Eventually many sensors will contribute to this new means of computer access, but as in human recognition, the eyes and the ears will be key.

Our R&D converges in a model of decision and effective management of resources supporting the seeing, hearing mobile device and intelligent networks. The markets affected by such improvements in mobile devices are large and diverse, encompassing virtually all of the medias in the world. As most of you know, we have two waves of licensable IP. The more mature portion of our patent portfolio for which Intellectual Ventures has an exclusive license to sublicense, and the growing portfolio of retained patents, applications and ongoing R&D to which they have no rights. With respect to Intellectual Ventures aspect of our licensing program, we're continuing the process to resolve differences of opinion about allocation of revenues and cost that affect our profit participation agreement.

Yesterday, we concluded a mediation. The dispute resolution process will continue. We have no further comments on this matter at this time. As I noted earlier, the retained portfolio is growing at a rapid rate. We now have 47 issued patents and over 300 applications pending. There is a very healthy rate of new filings flowing from our increased R&D. A key objective of the 2013 plan is to have sufficient licensable IP to project significant new license income sources in 2014.

We are pursuing this goal by identifying target markets and specific licensing opportunities within those markets, optimizing the portfolio in relation to these targets, requesting expedited issuance of high-value claims and preparing for marketing and enforcement, if necessary.

We have exciting prospects and a very ambitious agenda for 2013. We continue to believe that seeing and hearing will become routine functions in mobile computing devices, providing a natural successor for a substantial share of discovery, first realized on a global scale by the keyword search functionality popularized by Google, and now shaped by the rise of mobile computing.

As I noted in prior calls, the developments we are pioneering will foster more complete and engaging relationships between retailers' brands and their customers and prospects, providing customer engagement, accountability and access to critical information about shopping and consumption characteristics. This dovetails nicely with a growing desire of retailers and brands to tell stories of productivity and lifestyle enrichment in the new social networks. And more effectively manage and deliver engaging and rewarding branded experiences to their customers. It also fits well with new methods of integrated media marketing, providing consumers with greater flexibility in how, when and where they get their products and services, and information that helps them to make purchase decisions.

In closing, I want to remind everyone that all employees of your company are shareholders. The hallmarks of success in 2013 will be patience, perseverance and orchestration. We share alongside you in the risk and rewards of that strategy. We're fully engaged, energized, excited and confident in our direction.

That's it for our prepared remarks. Now we'll open the call for questions.

(Operator Instructions) Bill Gibson, Legend Merchant.

Hi, Bruce.

Hello.

You sort of shrouded the new developments in the sense of, hey, we're working on things we can't talk about and then you went off on things such as mobile payments and in-store advertising and TV and -- basically an alternative for barcode. Are the other things you can't talk about larger than these? Can we play the breadbasket game?

Now, what I can't provide at this point in time is names and numbers and details of such things. So for instance in the area, the payments processing area we have been exploring some relationships with some large companies, discussing novel approaches to the mobile payments that we and they think have promise and it's just premature to given any details and I'm not permitted by confidentiality restrictions. But it's quite an interesting area and one of enormous potential scale and it's consistent with much of the competence that we've developed in are work in security, both in Central Bank business and in the ID Systems business that we divested in 2008.

So it's just one example. There are several of them. As the script notes, some of which were contemplated in the plan and some of which have come up since then, or have been pulled forward in some sense from future periods where we anticipated doing certain things.

Thank you. Appreciate the clarification.

All right, Bill.

(Operator Instructions) Paul Sonz, Sonz Partners.

Good afternoon. Bruce, did you say in the call that you would be cash flow breakeven this year despite the increased expenses that you're taking on?

That was actually Mike's part of the presentation. As you know, we don't give detailed financial guidance but we expect to be somewhere around that range. And again, we have plenty of capital, so there is no capital risk in -- changes in the plan that we made. We're obviously going to grow our staff quite materially this year. That was the main point we were making.

I think the actual number beyond the people from Attributor would be an additional -- I took a quick guess, it was about an extra 35 people above and beyond your normal staff plus the Attributor staff?

Not quite there.

No. More like 25. We had 107 on the 1 of December. We've added 19, and then we're going to end up over 150.

Okay. Now early on, and as always your scripts are very packed with information and there was one thing that I'd missed. You discussed the fact that your relationship with government business and then I think you went on to discuss how with the new opportunities that was -- that focus was going to change to some extent. Could you just go over that again, because I didn't quite get that?

Sure. We have historically described the area of business that includes the central banks as government programs. We will not do that anymore. That's because there is a different axis of opportunity that we will focus on. So government programs meant that we were seeking to extend our business relations with central banks to other government agencies primarily in defense and intelligence. We're not going to focus on that. In fact, we told you on our prior call that we were backing off on that because it was proving to be unreliable and difficult and opaque, on and on.

So the central bank business is going to grow nicely this year with expanded margins. But what we have discovered through some inventions and some exploration of relationships, there is an opportunity that is premised on our confidence in payment processing, and central banks overseas all payment processing. So you can call if you like central bank domain, but I don't mean to imply more business with central banks. What I am talking about here is mobile payments and a novel approach to facilitating greater use of mobile payments.

That is exciting. If you were to prioritize the new opportunities that you talked about on the call so far, how would you rank them in order of most likely or nearest term and latest revenue, I suppose they could be different. But if you were to rank the opportunities in order of what your expectations were, how would you rank them?

I don't think I can do that, Paul. I believe that the increased resource investments that we're making is warranted by the portfolio of opportunities that we are working on. But I frankly don't do the exercise of trying to handicap the timing of the outcomes, because it really doesn't do me much good to try to do that. But I think that the area where things can happen most quickly in terms of upsides that's difficult to project is in licensing. All right? And the other stuff takes some time to develop. And so I think in terms of services and subscription, you should expect that we will able to publicize indicators of progress that will be leading indicators of growth in profits.

In the new areas that you're so excited about, are they dependent on the second-generation of your patent portfolio, or is this stuff that's still going to be dependent on first generation?

It's both. What we expect to see is that the exponential growth in patents that we have demonstrated since inception will move to an even higher rate of exponential growth. All of the resources that we're hoping to add are in R&D, IT and sales and marketing. There is no proposed increase in G&A. And so we are already filing at an extremely high rate we expect to significantly increase the filing rate through the addition of the R&D and IT resources.

You mentioned that you are going to have people in sales and marketing. This is in a way I think this is sort of a new for Digimarc. To whom will they be marketing and I mean in a general sense, not in specific sense, is this sort of a, they are marketing to like a half a dozen major corporations or what kind of marketing is it, sales and marketing, if you can discuss that?

I can. So we have increased the sales resources for our e-book business, our magazine publishing business and our retail business. Those are the three areas where there are increases.

What is the retail business?

It's the developing area of business that we described as key component of our 2013 strategy and plan, first embodied in terms of public announcements with the adoption by Costco in their member publication of our technology.

Oh, I see. Okay. All right. But listen, thank you very much. It's wonderful to hear you guys so excited about this. And we're looking forward to hearing, I think you said that there will be more information coming out in mid-May, is that right?

Yeah we plan on posting some additional information about the business in mid-May. I prefer to wait till then describe with anymore specificity what that is. But we will put some more stuff out.

And are you going to be at any conferences that we should be aware of?

No.

Okay. All right. Thank you very much. Good luck.

All righty. Thanks' Paul.

Thank you. This concludes today's question and answer session. I would now like to turn the call back over to Mr. Davis for any closing remarks.

All right, thank you very much everyone. We will keep up to date to the best of our ability, including any interim announcements that may be appropriately. But we will look forward to giving you another update on the strategy at the end of Q2 in an event. Thanks very much.

Thank you. This concludes your conference. You may now disconnect.