Digimarc Corp (DMRC) 2013 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 discuss and review Q2 2013 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 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 conference 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 Q2 revenues were 15% higher than the same quarter a year ago. The majority of the year-over-year growth is due to the acquisition of Attributor, with most of the rest of the growth coming from our work with the central banks.

Revenues from the former Attributor business acquired in December were below expectations, and well below the revenue threshold associated with the earnout consideration. At this point, we do not anticipate paying any of the contingent consideration associated with the acquisition. We've been working on restructuring and expanding the business now being marketed under the Digimarc Guardian brand. We feel that the business is now on an upward trajectory. After navigating numerous transition challenges, there is a good strategy and a stable and productive team in place.

Our Q2 results included the second quarter of operations since the acquisition of Attributor, and we're in the final stages of integrating the Attributor team into the operations of Digimarc. In parallel, as you know, we have ramped our investment in growth initiatives, including further developing and marketing of Digimarc Discover, adding audio watermarking and packaging, and developing the second wave of patents, all in support of our vision of enabling computer networks -- computers, networks and other digital devices to see, hear, understand, and respond to their surroundings.

Looking further into the details of our Q2 2013 financial results, we see that gross margin was 80%, 3 points lower than a year ago, due to the higher percentage of revenues from Guardian's subscriptions associated with the Attributor acquisition. Operating expenses increased by 20% over the year-ago period, due to the addition of Attributor operations, and increased investments in R&D and marketing. Our operating profit was $1.4 million or 13% of revenues, and operating cash flow was $2.8 million or 27% of revenues. And the balance sheet remains in excellent shape, with more than $40 million in cash and securities and no debt.

In our past two calls, 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 that we received and recognized in Q1 of 2012, and the quarterly minimum lease payments from Intellectual Ventures that ended during Q2 of this year, partially offset by 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.

In our last conference call, we also indicated that we are increasing our investments 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 adoption of the plan. We expected that our permanent staff and consultant headcount would exceed 150 full-time equivalents by the end of Q3. We remain on that plan with the quarter-end headcount at more than 140. The focuses of these increased investments are in marketing and product development of Digimarc Discover, as we look to expand our offering to larger enterprises and broader markets, particularly in retail in support of the shopper's journey; commercializing our consumer packaging and audio watermarking solutions; directed research in a number of areas, including exploring opportunities in mobile payments; developing our second wave patent portfolio and associated monetization programs; and improving the operational efficiency of Attributor, now known as Digimarc Guardian.

As discussed in this and previous financial results conference calls, the combination of lower revenues and increased investments will depress near-term income. We currently expect to report a GAAP loss in the second half of the year, reflecting the completion of the minimum payments from intellectual ventures, and the impact of our accelerated investments in our strategic initiatives.

Despite what is likely to be a GAAP loss for the year, we expect operating cash flow for the year to be positive, and that we will have adequate capital to fund our investments and pay our dividends for the foreseeable future. And, speaking of dividends, the Board of Directors has declared another quarterly cash dividend of $0.11 per share of the Company's common stock. The dividend is payable on August 12, 2013 to shareholders of record as of the close of business of August 5, 2013.

For further discussions of our financial results and risk prospects for our business, please refer to the Form 10-Q that we expect to file shortly. And Bruce will now provide his comments on our execution of strategy and our outlook.

Thanks, Mike. I hope that you have all had an opportunity to study the mid-May supplemental presentation detailing our strategy, as well as our new video showcasing our vision for the enablement of the shopper's journey with retailers and brands. Both are available on our website, and our execution of that strategy is well underway.

We have increased our rate of investment in R&D and marketing to address certain time-sensitive market and relationship opportunities. I believe that this is a potentially pivotal year for Digimarc, where we may be able to realize significant increases in value of the Company, if we can effectively 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 intend to invent and deliver, directly and through licensing, a common platform that connects prospects and customers' brands across the full spectrum of what the retail industry refers to as the shopper's journey.

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

Our publishing business continues to grow at a healthy rate. Watermark scans by readers were roughly triple last year's numbers during the quarter. The same was true for the number of watermarks purchased by magazine publishers. The number of watermarks per issue has been steady at around 10 per issue. Coupons, recipes and sweepstakes continue to garner the most hits. And the vast majority of activity was in the United States.

We were pleased to have the Ford Motor Company add its brochures to the mix of publications enabled for automatic mobile connections to this important -- to important product information and purchases. With a few months of enablement of the Costco Connection member magazine behind us, we are seeking to expand our relationship with Costco in accordance with our retail strategy, as outlined in previous calls.

We are working to bring onboard another Tier 1 retailer before year-end. We introduce mobile optimized audio watermarking via our online services portal. We've not yet done any significant outreach beyond the initial announcement to allow for some experimentation by prospective clients. The intended role of this new offering is to facilitate mobile discovery for television and radio advertising, and increase retail engagement with indoor location-specific merchandising and promotion. With the addition of audio watermarking, we now believe that all elements of the shopper's journey are ripe for mobile discovery, enabling unprecedented engagement across all touchpoints of the journey.

Obviously, a key ingredient in our retail strategy is packaging. We continue to make good progress in developing an invisible barcode solution for consumer packaged goods. During Q2, we successfully integrated our software into an imaging scanner for a leading vendor. We were discussing with them how best to bring the new capability to market. In parallel, we have been expanding coverage of various form factors, materials and printing processes. The industry experts we hired completed their work on models for positioning, packaging, and other aspects of preparing for successful market entry.

There are numerous potential relationships in the formative stages that could provide significant momentum to our quest. Big companies provide lots of challenges as well as opportunities. We are doing our best to keep these budding relationships on the rails and supportive of our strategy, without overextending our resources.

We have been making great strides in improving operations with the former Attributor business. The resulting efficiency should provide a good ROI, as we improve sales, marketing and development to foster growth. It's clear that the former Attributor management's forecast is unattainable. We are implementing changes in the business intended to improve profitability and growth prospects.

Licensing will continue to be a key element of monetization of our inventions. All these developments that I have 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. And we're not alone in our belief. Many major mobile infrastructure and technology providers are investing heavily to enable pervasive intuitive computing, also known as the Internet of Things.

Our R&D converges in the model of efficient 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 media in the world. There were no substantial developments in our arbitration with Intellectual Ventures during the quarter. The process is moving along consistent with the dispute resolution provisions of our license agreement. We will keep you informed of any material developments.

The retained portfolio continues to grow at a rapid rate. 41 patents have issued thus far this year, with 21 of the 41 feeding our second wave portfolio, which has now grown to 56 issued patents. Second-quarter issuances include innovations and copyright filtering, second screen television and indoor location. We filed 37 applications in the second quarter, bringing the total second wave patents pending to 328. Topics included in the new filings include Internet of Things enablement, three-dimensional object recognition, and mobile payments, among other things.

During the quarter, we added staff to IP development, with an aim toward an even higher rate of filing and an enhanced focus on process improvement, to maximize our return on these important investments. As noted in prior calls, a key objective of the 2013 plan is to have sufficient licensable IP to project significant new license income sources in 2014.

I'm pleased to report that we are a bit ahead of schedule and that we have begun an important marketing program for certain second wave assets, engaging a significant potential licensee, who we believe is currently using some of our patented inventions. We are expediting examination of claims, where we will see potential immediate relevance to the market as well.

We will be investing heavily during the remainder of this year to meet certain development and marketing deadlines. We're building or improving all aspects of the intuitive computing platform, with the intention of having a fully functional system ready by year-end. And with the release of audio watermarking, we have the major elements in place.

We continue to develop our consumer packaging solution, and are making significant improvements in our online services portal, including simplifying embedding in various Adobe plug-ins for advanced users. We're also working on the user interface and performance upgrades for our mobile app. We have completed integration of our detector into a leading checkout scanner, and are working on similar integrations with other such scanners.

We are improving reporting to discover clients, supporting information requests and collaboration initiatives of numerous infrastructure providers, and continuing basic R&D on a virtual wallet solution to add simple and effective mobile payment processing to the shopper's journey enablement. And, finally, we are making significant changes to our Guardian solution to improve its cost-effectiveness and competitive differentiation.

Fourth-quarter investments include major presentations at two important industry events. We will be a primary sponsor at the American Magazine Media Conference in October, the magazine industry's premier conference. We have also purchased booth space at the National Retail Federation Big Show in January, where we plan to demonstrate the full mobile optimized shopper's journey that we had developed. We expect this to be the largest marketing event in the Company's history.

In addition to these products and market development activities, we continue to ramp basic and directed research and associated IP development. We have made several recent additions to our strategic IP development capability. The intended result of these investments is to foster an unprecedented growth in our rate of invention and retain patent portfolio, laying a solid foundation for the next wave of patent income for Digimarc.

Halfway through the year, we are making good progress in execution of our strategy. It's a very busy year with exciting prospects, a very ambitious agenda, and plenty of attendant risk. I am doing what I can to disclose as much as possible about our strategic performance without violating the trust of our partners or customers, or creating undue stress and risk in these relationships.

As I mentioned in closing on last quarter's call, the hallmarks of success in 2013 will be patience, perseverance and orchestration. We're all shareholders, and stand alongside you in the risk and awards of our strategy and execution. Our highly talented and loyal team is fully engaged, energized, excited, and confident in our direction.

That's it for our prepared remarks. And now I will open the call to questions.

(Operator Instructions). Paul Sonz.

Bruce, what is the cost, the ongoing cost of trying to settle this matter with Intellectual Ventures?

Yes, Paul. We've kind of disclosed any changes in our operating expenses in our Q, and that will be filed tomorrow. But we -- I think, you know, we probably spent maybe a couple hundred thousand dollars in that and other royalty license audits. We have an ongoing program. And so that's what we spent.

All right, so it's not a big deal one way or the other?

Correct.

Okay. All right. Well, that's all I have. It sounds exciting, and I can't wait to see what comes of it.

Thanks, Paul.

(Operator Instructions). At this time, there are no further questions.

All right, thanks, everyone, for participating. We will be in touch as soon as we've got some more material information for you. Thanks.

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