Digimarc Corp (DMRC) 2016 Q3 法說會逐字稿

Thanks for standing by, and 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. Sir, the floor is yours.

Thank you. Good afternoon. Welcome to our conference call. Charles Beck, our CFO, is with me. On the call today, we'll review Q3 results, discuss significant business developments and market conditions and provide an update on execution of strategy. This webcast will be archived in the Investor Relations section of our website.

Please note that during the course of the call, we will be making certain forward-looking statements, including those regarding revenue recognition matters, results of operations, investments, initiatives, perspectives on business partners, customers and prospects, industry trends and growth strategies. We also will discuss from time to time information provided to us by channel partners and actual or potential customers about their business activities. Please appreciate that we are providing this information as we understand it was represented to us by the customers and partners, and we do not verify nor vouch for such information.

Such forward-looking statements and statements of our partners and customers 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 the Form 10-Q that we expect to file shortly.

Charles will begin by commenting on our Q3 financial results. I'll then discuss significant business developments, market conditions and execution of strategy. Charles?

Thanks, Bruce. Good afternoon, everyone. Revenue for the quarter was $5.6 million, up from $5.4 million in the third quarter of last year. Most of the increase was due to higher service revenue from the Central Banks. License revenue was up due to higher reported royalties from a licensee, but was largely offset by lower subscription revenue due to completion of revenue recognition on a confidential software license.

The more well-established areas of our business continue to grow at modest rates. We realized a higher than normal level of revenue growth than our Central Banks relationship this quarter as we anticipated due to increased program requirements. We expect this increased level of program work to continue through at least the first half of 2017.

Regarding our growth initiatives, Digimarc Discover and Barcode (sic - see press release, "Digimarc Barcode"), new bookings during the quarter were significantly higher than in the third quarter a year ago at $900,000 versus $100,000. A three-year enterprise license accounted for the majority of the increase. We define bookings as the non-cancelable fixed value of a contract. We expect a lumpy pattern to bookings as we build out the revenue base in this area of our business.

Q3 service margins were down six points largely due to the end of a minimum services payments from Intellectual Ventures, while subscription margins were up 10 points, mostly reflecting lower Guardian operations costs. Overall, gross margin was 61% for the quarter, unchanged from the third quarter of 2015.

Operating expenses were $900,000 or 12% higher than Q3 of last year, reflecting previously noted increases in staffing for sales, marketing, engineering and operations to support our primary growth initiative. We anticipate hiring upwards of 30 to 35 additional personnel in the next six months to bolster our capabilities in these areas, generate more awareness and serve growth in customers and partners here and overseas.

Net loss for the third quarter was $5.2 million or $0.55 per diluted share versus a net loss of $4.5 million or $0.54 per diluted share in the same quarter last year. We ended the quarter with $66 million of cash and marketable securities. As you're aware, we raised nearly $40 million of working capital during the quarter through an underwritten public offering. We sold 1.4 million shares at a price of $30 per share. We invested $5.3 million of our working capital during Q3, including $3.7 million to fund operations and $1 million for capital expenditures. So far this year, we've invested $12.6 million of working capital, which is at the lower end of the range we projected at the start of the year largely due to the early receipt of a customer payment. We expect that cash usage in Q4 will be in the range of $5.5 million to $6.5 million, reflecting a reversal of that effect as customer payments are normalized and we incur higher operating costs from increasing our staff.

Here's some preliminary views to share regarding our 2017 budget assumptions. We expect revenue from Guardian to be relatively flat as we focus on growing the bottom line versus the top. Licensing revenue appears to have stabilized and could grow modestly over the long term. We expect service revenue to show mid-single-digit growth, reflecting increased program work from the Central Banks.

Subscription revenue should grow meaningfully during 2017 with increased adoption of Digimarc Discover and Barcode by retailers and brands. The amount of revenue and growth is largely dependent upon the timing and pace of adoption by industry-leading retailers and CPG companies and the effectiveness of our partners in the supply chain of these customers, which is inherently difficult to predict. Fostering demand among retailers and brands, supporting growth in relevant application development community and increasing the effectiveness and availability of relevant software, services and training will be the focus of our investment during the year.

Gross margins are not expected to change much until revenues ramp, at which time they should increase. Operating expenses will be up significantly, reflecting the impact of the staffing increases that I referenced earlier as well as increased marketing spend to expand awareness and educate relevant audiences here and abroad.

We anticipate entering 2017 with cash consumption running in the range of $5 million to $6 million per quarter. We are not yet comfortable assessing the impact of revenue growth, margin expansion or the timing of customer receipts and vendor payments. For further discussion of our financial results and risks and prospects for our business, please see our Form 10-Q that we expect to file shortly.

Bruce will now provide his comments on significant business developments, market conditions and execution of strategy.

Thanks, Charles. As Charles indicated, the legacy business is in good shape, producing cash flow and growing modestly. The focus of the investment community is on Digimarc Barcode, a powerful improvement on the traditional Barcode with higher performance and broader application. It is aptly referred to as the Barcode of Everything.

Keep in mind that the business model associated with Barcode has three layers, identification, discovery and applications. Together, these comprise a patented system we refer to as the Intuitive Computing Platform. The software used to discover media identified by Digimarc Barcode is known as Digimarc Discover. Discover is delivered via software development kit licenses to consumer and enterprise application developers. Discover is seamlessly multimodal, employing a number of indicators of identity of media objects in addition to Digimarc Barcode. The processing of these indicators is done for the user automatically.

Digimarc Discover reads many common GS1-standard barcodes, QR codes and Digimarc Barcodes for image and audio. We continue to enhance the identification capabilities of Discover. In Q4, we intend to add image recognition to the platform. This will permit brands to enjoy the benefits of our Intuitive Computing Platform for campaigns with short time windows that do not accommodate Digimarc Barcode and for products where the barcode implementation has not yet been completed.

The goal of Digimarc Discover is to provide users with the most reliable and efficient discovery engine for the identification of media. We believe that our unique and highly patented means of identification of media objects is transformational. Adoption of transformational technologies necessarily involve solution complexity and decision complexity. The solution complexity results from the lack of institutional knowledge of the technologies that cause benefits, risks and operational envelopes. We are working hard to communicate well and navigate the resultant purchase decision processes. This requires time and focused investment in architecture design features and the delivery model.

Proving value, although intuitively obvious at a high level, is not created in the lab nor in the trade show demonstration. Given the assumed mission-critical roles that our platform will play, the proof of value and extensive risk management analyses of prospective customers means that many stakeholders are typically involved. Further notion of tipping points, early market development has demonstrated an irony of desire for secrecy to support first-mover advantage alongside a desire to observe adoption by competitors and suppliers. This decision complexity leads to long sales cycles and the need for collaborative customer engagement that has been evident in our progress thus far.

We're in good shape to manage these challenges. We have engagement with industry-leading retailers, brands, licensing authorities and trade associations, supply chain partnerships that are growing in number of effectiveness, a strong balance sheet, effective working capital management, expanding institutional knowledge and progress and implementation of requisite software training and support services. We continue to make very significant progress in building a multifaceted ecosystem through our partner program to support effective and efficient globalization of the platform.

There were many big announcements during Q3 in this regard, including the Japan study group, collaboration agreement with GS1 Germany, addition of [DA] days and the release of Digimarc-enabled products by industry-leading point-of-sale scanner partners. The partner program is a key element of our market development strategy, allowing us to focus on our core competence in identification and discovery technologies while serving as a force multiplier in sales, marketing, customer acquisition, quality assurance and service delivery.

We are finding a need to have a great deal of direct involvement with customers in the early stages of market development. This is a function of customer preferences and the complex decision processes referred to above and the state of development of our platform. Over time, this complexity should dissipate, allowing our partners to serve the customers with less involvement by Digimarc. I still believe that the enduring model that most effectively serves customers and provides Digimarc with operational and financial leverage that will expedite progress toward timely realization of vision and mission resides in the partner program. As the number of partners grows and our support for them improves, our company's access to prospective customers and ability to serve them expands significantly.

During the third quarter, we continue to nurture relationships with some key customers, engage in rapidly broadening range of prospects both here and abroad, improve support for scanner, brand deployment, smartphone and media and entertainment channel partners as well as expand our service and support capabilities more generally. Leading printer scale suppliers are -- integrated Digimarc Barcode into their products to improve reliability and efficiency and add new customer features to variable product labels used in grocery store, butcher, deli and fresh food departments. These applications add more efficiencies to checkout, improving already impressive advancements in the checkout process enabled by Digimarc Barcode.

As you know, we have focused our resources on marketing and demonstrating improvements to front-of-store operations for retailers in the U.S. market. Opportunities to address the broader range of applications and geographical markets have emerged earlier than anticipated. We intend to continue focusing most of our resources on the domestic market. With the additional capital, we are adjusting our execution of strategy to support these expanded use cases and expressions of interest overseas. Post financing, we have been determining optimum support strategies for Europe and Japan.

We kicked off our GS1 Germany relationship with a featured presentation and demonstration area at GS1 Germany's ECR Tag conference in Berlin in September and a well-attended, invitation-only workshop with large retailers and consumer product companies last week in Cologne, Germany, resulting in numerous follow-up activities with prospective customers. We are presenting and creating test packages for three large retailers in Europe, starting a fourth shortly, and will assist one of the world's largest global retailers headquartered in Germany with trials planned for the first quarter of 2017. We have created a German subsidiary located near the GS1 Knowledge Center to assist in our post collaboration with them and to serve as the base for our European operations. We stared licensing negotiations with our first large European retailer.

On the Asian front, we hosted the leaders of the Japan study group here in Beaverton last week, mapping up next steps in that relationship. Both of these market development initiatives look promising. The pace of activity with retailers and consumer products companies has picked up considerably, including several new relationships developing overseas.

In the domestic market, we witnessed a spike in bookings noted in Charles' remarks. There were more pilot programs planned and underway than a quarter ago. The pilots include initial production for 2 of the top 10 retailers in America. A third top 10 retailer with whom we have had considerable involvement has informed us that they would like to discuss pricing and implementation plans. We now have productive discussions underway with many leading consumer product companies to support applications ranging from manufacturing to marketing.

The expansion of interest among consumer product companies is the result of coalescence of increasing awareness of Digimarc and their contemplation of the implications for packaging and other marketing vehicles of significant changes underway in technology, customer preferences and government regulation. There is a lot of stress around packaged innovation right now.

The August investment has enhanced our ability to nurture these opportunities as well. We are increasing staffing in sales and marketing to increase awareness and understanding of our platform. We are developing a learning management system to provide detailed education to everyone in the supply chain who is impacted by our system. We are delivering and refining tools to make the enhancement process more efficient and to improve quality control across a range of common workflows involving a growing number of suppliers and customers. We are deep in preparation for NRF in January and anticipating a great show. We expect to have considerably more complex presence there with another quantum leap in the number of companies supporting our Intuitive Computing Platform. As was true last year, some fluidity in plans will persist through the end of the year.

We greatly appreciate the additional working capital from our secondary public offering in August and the expansion of our shareholder group to include several more very high quality investors. Their investment gives us more discretion to make good judgments about uses of working capital that will advance our progress in execution of strategy. The fresh capital should enable more rapid market development. We understand and appreciate the need for convincing evidence of progress to reward and reassure our expanded ownership of the wisdom of their decisions.

We are very fortunate to have added two outstanding directors, Andy Walter and Gary DeStefano, to our board after the financing. These gentlemen have long distinguished careers as executives at world renowned consumer products companies. They joined Dick King, with his executive experience at a leading retailer, to round out an excellent board profile matching our stage of execution of strategy. These changes improve governance and oversight for our shareholders and advice to me and my team about how to continue to develop the market and build credibility for a prosperous future for our company and this remarkable Intuitive Computing Platform.

The basic building blocks are in place. We need to make progress in and make public relationships with leading brands and retailers. We need to continue to improving the tools, training and technical support for our supply side partners. We need to continue to expand awareness and understanding of the platform with customers, business partners and policymakers. We are working hard on all these things.

Thank you very much for your support, and that's it for our prepared remarks. We'll now open the floor to questions.

(Operator Instructions) Our first question comes from the line of Rob Stone with Cowen and Company.

I wanted to drill down a little bit on your comments about long sales cycle and complexity and additional pilots. And since you have a sense for what is it that these prospective customers feel they need to test that hasn't been demonstrated already by Digimarc in various controlled settings or by other customers that have already deployed, do they expect to see something different in their own front of store operations? Or what's -- how many times do you have to reinvent the wheel before, first of all, we'll accept that this stuff works?

Yes, yes, let me try to answer that in a few different ways. One is to observe the differences in market development approach in the U.S., Japan and Germany. So in the U.S., everybody wants to keep everything a secret, and that creates a lot of inefficiency and delay. In Japan, now over 20 industry leaders have gotten together and formed workgroups to do the test and share all the results with other members of the work group, probably most efficient, but starting a couple of years later than the U.S. and carrying with it a presumption by many people that Japan goes slower than other markets.

And then in Europe, our new colleagues, GS1 Germany, appear to be quite entrepreneurial and yet we're not well informed about the way in which the clients want to proceed. So it seems like you see three different models, one very inefficient in the core market here in the U.S.; one very efficient in Japan, not known for moving fast; and then one that appears more entrepreneurial than the U.S. and less structured than Japan and Europe.

So we actually have some laboratories, if you like, for different approaches to the market development that represent a full range of ideas. What we are observing is, I'll call it, just sort of a big company risk management. There are some tests of our ability to solve certain problems, identify problems within the enterprise that are not simply funds from operations efficiency and consumer engagement. And the companies have a process for doing such things to establish a target ROI so that they can work on pricing and total cost of ownership implications of implementation.

And then in other cases, they have a process for acquisition of innovation that requires that there'd be tests and reports and discussions and so forth. What I think is most impacting the pace of adoption is the enablement of the supply chain, and you know our model and our strategy and that is that, of course, we had to do everything ourselves first. But we've been building a supply chain, developing tools, providing training and trying to work out the optimal mechanisms for support for the existing pre-press and design suppliers to do this themselves and just send us money. And so a lot of the testing revolves around the supply chain and the enhancement process and making it more efficient, more reliable and faster. And so I would say that that's probably where most of the friction resides right now.

The other side of the equation, the value side, I think, is increasingly presumed. I don't think there are a lot of prospective customers and actual customers who doubt that we can deliver significant value. They're just trying to figure out what the business process implications and total cost of ownership and risk profile and operational envelope and so forth are for their chosen applications of this platform.

So I wanted to make sure I understood what you said correctly with respect to the international expansion. It sounds like a relatively quick uptake at least of interest for initial testing with what was the three European retailers and a global one that's headquartered in Germany, these are all relationships that didn't exist six months ago, I guess?

No. No. They are relationships that we have been minimally nurturing for varying periods of time. But the collaboration within GS1 Germany is a catalyst for action. It provides a lot of benefits to the clients in terms of the expectations of involvement GS1 Germany, and we now have a much larger voice there than we had before. We're in the process of working out what the proper level of resource allocation is to the European market, and so we don't have all that settled yet. That's really been enabled by the August financing.

But you set up an office there?

Yes.

Okay. So the GS1 as a catalyst really underlines your point about the ecosystem being a key in enabling all of this?

Yes. Yes. And we have been really nominally staffing the European expressions of interest prior to the financing on the agreement for collaboration with GS1 Germany. And so we think that they and their facilities provide an ideal base of operations for us for the European Union. They have a very impressive demonstration facility there. We are subleasing space from them there, and we intend to have permanent staff in Cologne, Germany, making that the center of our activities for the foreseeable future in Europe.

Great. A follow-up question for Charles, if I may. You mentioned the big uptick in bookings, and that's non-cancelable revenue over the term of the agreement. Are you able to say what the term is?

I said it was a three-year enterprise license.

Three-year, okay.

Our next question comes from the line of Jim Ricchiuti with Needham & Company.

I wanted to go back to the comments where you're talking about in broad terms looking at 2017 and you talked about the potential for a meaningful increase in OpEx. And I'm wondering, do you -- how much variability is there in what you're looking at right now in terms of geographic regions? In other words, are you fairly set on your investment plans for the U.S. market? It sounds like there potentially could be more variability in the overseas markets. And I wonder if you could talk a little bit how we might think about some of those line items. Is more the expense going to be in the sales and marketing area, R&D?

So the question of resource allocation for the overseas markets is still in the early stages of development because it really -- if not for the financing in August, we'd have quite a different posture regarding that. So the residual concerns revolve around the organization's capacity and not putting us at risk for performance in the core U.S. market where we have made most of our historical investment and where we do have, we think, excellent prospects for progress. So that -- it's really a management question more than a financing question at this point.

And the resources that we would employ in those geographies will depend on the nature of the requirements there. And so as you know, in Japan, we really don't need marketing resources there. We just need to provide technical support to the study group. And in Europe, we probably need client management resources because there are many prospective clients who say they are quite interested and some of them saying they're ready to go. And so we need more account management. Today, we have one account manager for the entire European Union.

Okay. Bruce, I wonder if you could also comment as we're still a ways off from July 2018. But with respect to some of the new information requirements with GMO and new nutritional panels, I'm wondering to what extent you've been able to perhaps insert yourself into some of the discussions with the brands and retailers that may be looking at major packaging redesigns in the coming one to two years? Is that starting to pick up? Or are you seeing more activity there?

There's been a very big increase in interest in learning more about the platform at CPGs who haven't been engaged, and a lot of discussion and complex decision-making with those who we already have relationships with about how to deal with, I'd say, a worsening situation regarding package design. It's a very challenging time for the food product manufacturers, in particular. But all consumer products companies are being faced with an increasing desire by consumers for information at the point of purchase and during use and reorder. And the government regulation reflects that, but then puts, if you like, more force behind it. And obviously, our eyes are not getting more capable of reading mouse print and the desire for packaging economics will not really foster bigger packages.

So the only answer, I think, resides in enabling a digital connection from the package. It seems so natural and obvious in the 21st century given the progression of smartphone importance in everyday life. But that's got to be the answer, and we think we are the best means of implementation for that answer. But when it gets to the brand manager and the package design departments of the large brands, they're just scratching their heads trying to figure out how to move forward in a responsible fashion. And that's why increasing our sales and marketing and educational resources is very timely in order to make sure that we're making them well informed as they're engaging in these decision-making processes.

Do you think these CPGs, the brands, share this view that you have? And I mean -- or is this a decision that's going to be pushed up the organization beyond some of the folks that your sales and marketing guys might be dealing with?

We're becoming better known, and as people learn about us, we're receiving very favorable responses generally. And this is somewhat derivative from the strategy that we embraced of managing our working capital carefully is that we haven't had as big a voice as we might have had and we weren't as well known as we could have been, and we're now mitigating those disadvantages by creating a bigger voice. And so I think that it's pretty clear to most prospective customers that if they can adjust their business process to include this design element as the Central Banks have now done in the security printing world that everything will go better for them.

So that's why I think the value proposition is pretty solid and pretty easily understood. It's the business process engineering aspect of it that they approach cautiously because the supply chain -- the print supply chain for commercial products is very complex and the economics are really dialed down. The brands are obviously trying to get the best deal they can, and so there's a lot of bidding and movement around and so forth. And I think that's what we will address through investment and will really be a focus, as I noted in my prepared remarks, in '17. We're going to make a lot of progress in the enhancement process and by doing that, I think we're going to speed up the rate of adoption considerably.

Our next question comes from the line of Josh Nichols with B. Riley.

I was wondering, there's been a lot of talk about some of the international opportunities given the GS1 partnership in Germany. But I believe on the last quarterly call you mentioned that you were just starting getting the marketing plan together with GS1 U.S., and I was wondering if there's any updates you could provide on that.

Nothing specific, Josh. We're making progress. We've got a very thorough collaboration. We are cooperating on major account development. We make a lot of joint presentations. You may have observed a week or so ago, we did a webinar with an executive from GS1 and another supplier, and we have more work to do on our website connection with them to make that easier to use.

And so I think we're off to a good start, and everybody is dedicated to the common purpose of helping the industry make efficient and effective use of the platform. So we're just motoring along, I guess I would say, in general terms and building out that relationship.

Now that GS1 Germany is on board, we now have two of the largest member organizations at GS1. So we're also noodling on how we are efficient in bringing on more member organizations as knowledge of the platform spreads around the world and the initial expressions of interest and demand emerge.

And you've been working on a growing number of pilot programs. Have you noticed any change in the duration of the pilot programs? Are you finding that people are still a little bit slower to adopt because there's not so much of a collaborative effort in the U.S.? Or is this accelerating the business as people get more familiar with the technology?

That's a good question. I don't know if I observe any definitive answer to that, Josh. What I do observe is evidence of my presumption being well-founded that this market will get excited when certain people announce their support for the platform. As I mentioned in the script, everybody's kind of looking at everyone else.

And because of the secrecy, they don't quite know what's going on, they're a little worried about things going on. There was a remark in a report on a meeting with a major brand recently that someone in the audience of the brand said, "You know, one of our competitors, I heard that they're moving along. We don't want to be second." So it's a paradoxical situation where they want to get first-mover advantage, but they don't want to be the only mover. If their competitor adopts, they're going to jump right on, that until they adopt, they figured they still got some time. And so it's difficult to characterize in direct response to your question.

Yes, and then just as a follow-up to that and then I'll hop back in the queue. If there was a major retailer or consumer products good companies that was to actually go out and adopt Digimarc Barcode on a large-scale basis, would at that point an announcement have to be made? Or would it still be feasible that no announcement is made even though they've entered a full rollout production cycle?

No, there's no legal requirement or any other kind of mandate that would cause anyone to announce anything they didn't chose not to announce. So as I said, we've got some early production going with a couple of top retailers and in one case, we expect some product to get to the shelf this year and there are no announcements planned.

Our next question comes from the line of Saliq Khan with Imperial Capital.

Two quick questions for you. One of them is with the increased hiring that you've done over the last several quarters, if you take a look at the criteria you have for hiring as well, could you define the type of backgrounds that you're looking for currently from the sales reps? And also, could you talk about the mandates or the different annual or quarterly hurdles that you've actually talked about as well internally?

The first question was about qualification in salespeople. I don't think I got the second question.

The second was the mandates that you've actually given them. Are there quarterly mandates or annual mandates they need to meet?

Oh, mandates. Okay. All right. So most of our senior account sales staff come from retail environment in the scanner business. We recently hired someone who will focus on mobile licensing the Digimarc Discover software for smartphones to pursue our stated goal of supplanting the scanner modules in major retail smartphone applications and to also propagate the software elsewhere in the mobile device market. So that's a different profile, if you like, than what we have in place.

We're also pursuing some more sales resources who have experience in selling to consumer products companies [assuming] from retailers.

In general in the company, we are focused on the pre-press environment, the space between design and manufacture. It's an area where I believe that we need more institutional knowledge. And so in every position that we're seeking to hire, that's viewed either as a requirement or a great positive in assessing the experience of candidates.

Got it. And then Bruce, the other question I have for you was if you take a look at first quarter earnings call, one of the things that you talked about was the collaboration and the relationship that you have now with Portland Trail Blazers. Could you give us an update on that relationship or other sports and music industries channel partners that you also focus on and how that should be evolving over the next several quarters?

Yes, in our budget assumptions for 2017, we're not anticipating significant growth in the media and entertainment area, which is where that resides. And that's because the Portland Trail Blazers relationship was put together toward the end of last season and we're starting a new season. And so we've got to try some things out. The desire of the Blazers is to have an application called FanScan that engages their fans everywhere. So it's that notion of the Shopper's Journey enablement, it's wherever there's a brand impression for the Trail blazers, they'd like the opportunity for the fan to engage more deeply with the brand and the team.

We've got some other collaborators, so there's a little team working on this and we'll see how it goes. We know that the NBA had offices keeping an eye on it. We've had contact with a couple of other major professional sports teams who are interested in how it goes.

So we'll see. We're going to try some things out and see how things go with the Blazers. And if it works, then of course, we've got an offer more generally for the NBA, but also even more broadly than that for professional sports and for venues. And so it's an important market research and market development, but it's still very early stage, so it's hard to handicap.

Our next question comes from the line of Jeff Van Rhee with Craig-Hallum.

A couple of questions for you guys. I guess, Bruce, just first on the three-year enterprise license, can you talk about -- maybe just expand a bit on that, I'm kind of curious, the type, scale of customer. Any incremental -- obviously you can't share the name, but just a little better sense of who they are and where they fit in the ecosystem, what their SKU mix looks like. Anything along those lines will be helpful. And then also along those lines to the sales cycle question, I mean, when did the discussion start with this player, initial production? I think maybe a lot of lessons to learn from that one, or some lessons at least?

Well, Jeff, you can probably predict my response, which is I can't tell you who it is, and I can't really hint around too much about what it's about. But it was a result of quite a long gestation and testing and so forth and a desire to then move to production. And we'll sort of see what happens in terms of public announcement. There might be one, there might not, but they have sufficient confidence to enter into a three-year license with a substantial cost. So it's a good sign, and we didn't learn anything special there. It's just part of developing the market.

And long gestation, I mean, are we talking 18 months, 36 months? I mean, any sort of ballpark when this player started looking at the technology?

Yes, I think it's probably 18 months. Yes, it's been well over a year.

Okay. All right. Second, you mentioned an image recognition capability and application. You're going a little fast. Can you circle back to that and just give it a little slower as to what you're bringing there and why?

Yes, yes. So I started off with some basics. Some of our shareholders and analysts have long histories with us, but the platform structure for the Intuitive Computing Platform is that there's an identification layer and we think that Digimarc Barcode is the best means of identifying media -- all media for all applications, but it's not yet propagated very broadly. And so the Discover software, which is the second layer that enables the third layer applications, looks not just for Digimarc Barcode but for conventional 1D symbologies supported by GS1 and QR codes.

What we've observed in our relationships with brands, and in particular in our relationship with Shazam, is that there's a desire for creating a network connection to marketing materials that is growing. But in some cases, the timetable doesn't allow for the implementation of Digimarc Barcode. And so there have been a number of companies, and most recently Google acquired a small company in image recognition and Google has had an image recognition project going on for about 15 years now, those companies, I don't want the brands who think they need to go there because of time constraints. And yet image recognition has many limitations, and we have documented them and presented them to our clients and business partners.

So we think there's a way in which we can implement image recognition for certain kinds of activities where the activity is thoughtfully characterized and the procedures are all mapped out thoroughly and followed. And that's our offer.

So our offer to brands and to business partners like Shazam is that in certain circumstances where we believe a reliable and efficient result will be obtained through image recognition, that the clients can go ahead and do that with us. And so our strategy and our vision for the Intuitive Computing Platform is that Discover will always be larger, if you like, than Digimarc Barcode and that its job is to provide reliable, efficient discovery of things. Digimarc Barcode's job is to be the most reliable and efficient way of identifying something. And so you should expect that we will continue in a measured way to bring other indicators of identity into the Discover software element of the platform.

Okay. All right. That's helpful. And then just lastly for me, you referenced specifically within the commentary about the domestic environment, more pilots than a quarter ago and you referenced two top 10-ers and a third top 10-er that's going into pricing -- discussing pricing and implementation.

Two questions, you referenced a number of pilots and other items last quarter. Just to be clear, are these new that were not mentioned last quarter? And then secondly and maybe more importantly, for instance, the two top 10-ers that you said are in initial production, talk about those. And I don't need names, but what did they do -- how long have you been working with them to get to what's called initial production? What is initial production? And kind of what have they laid as hurdles to move out of initial production and into full production?

Okay. So there are more products than a quarter ago in number and more participants in number than a quarter ago. I don't want to get down to sort of give a specific number of each quarter of how many people are involved because sometimes things ebb and flow, right, and we're just wasting our time trying to handicap whatever is changing in those numbers.

With respect to the large retailers, one of them just got started in the past quarter, so brand-new. The other one's not been involved for a long time. The third one, we've been offering up some proofs for a long time and they just recently said, "Let's sit down and figure out how to do this and how much it's going to cost us." So that's characterizing the three.

In terms of the scope, pilot projects can be -- can involve a range of scope. What I mean by pilot production means that there are some number of labels and packages that are intended to go to the shelf. And so what the clients are interested in doing that is to understand the entire life cycle of the product and the implications of the platform for that life cycle, all right? So supply chain study, application study. Applications, again, range from manufacturing to marketing, total cost of ownership, risk management, all that stuff.

And one of the things I don't think I can do justice to in a call and you as analysts probably can't do in your reports is how complex and how serious package design is in a consumer products company or a private brand or a retailer. So it may appear simple on the surface. It's actually very complex and managed very seriously in these enterprises. And so we're -- we fundamentally affect package design and the use of the design for applications.

Yes, I guess just last one then, I know you're fighting a good fight to try to get some of these folks to let you use names and help jumpstart the domestic market. You laid out an initial goal trying to get a big name up there before NRF. I understand a lot of it is outside your control. Any change in conviction in terms of your ability to achieve that? Any incremental pushbacks or tailwinds in being able to accomplish that?

No, I don't want to try to handicap such things. We're still trying and we still got two months to go. So we're doing all we can. We'll see what happens at the show. But what I do know will be true of the show is that our footprint will be significantly larger at the show in terms of relationships, and we'll see what we can do on the customer side of things. Those things I really don't feel comfortable that I know what will happen until we get to the show, frankly, because of the possibility of someone changing their mind. Even if I have their assurance now, I wouldn't express it to you.

We have a question from the line of Jim Ricchiuti with Needham.

The pilots that you have that you're working on with retailers or brands?

Yes, both.

Is it skewed more toward retailers?

No, it's actually it's probably more brands. And it's one of those thing, it's just -- this is a very -- the most challenging time, I think, in history for package design. And it really is driven by increasing complexity of the supply chain and with it, more information that could be shared that is relevant, like health and safety information. There's more counterfeiting and diversion risk, and there's more -- there are more stories to tell from a marketing perspective about what's known in the industry as provenance or where did the stuff come from, is it a good thing where it came from versus a bad thing.

And then the improvements in supply chain allows for multiplicity of vendors of everything in the supply chain. So the supply chain has gotten a lot more complex, which calls then for effective management of media within the supply chain increasing complexity. And then digital technology has trained a new generation of shoppers that are becoming more powerful elements of the purchase equation and centered around millenniums -- millennials and younger who believe they should be able to talk into Siri or type into Google and find out everything about everything.

So when they're making a purchase decision, if the flow of information is perceived as inadequate, there's a lack of trust. And the government has been lobbied by people who are saying, "Well, the brands have an obligation to get more information, not just to be good marketing." So it's a mess out there. It's really difficult, I think, for the brands to do their jobs more so than ever before.

I believe that we're part of the answer, and I think our timing is good. And I think that increasing our voice is the right thing to do, and now I'm comfortable doing it because of the stronger balance sheet. So I think that's what's going on. It's a very interesting environment and I think a very positive one for the ultimate success of our platform.

How challenging is it for these folks to design effective pilots where they can get the information that they're looking for? Or are they struggling a bit with how to design these pilots where they know this is the next step?

Well, we're trying to teach the answer to that, Jim, and some of the students are receptive and some aren't like in any classroom. But what we have been saying for some time now since our processes have matured sufficiently is, look, don't do test stuff. Do product. Pick some products, enable them and ship them. And then when you got enough product to do whatever it is that is your application focus, run the application test against real product.

Well, in some cases, they're embracing that. They get it. And in other cases, they have a process they want to follow which is different from that. And then in some cases, there is a bunch of collaboration required, for instance, in manufacturing applications. We're obviously not the only vendor who's going to be involved in the manufacturing application. And so there you have to structure test because you can't merely throw it into production because the production is very high volume and the cost of any breakdown in the process will be very expensive.

So there's a full range of activities going on here, some of which makes sense to do in an offline test environment and some of which, in our opinion, doesn't. And that's why I really appreciate DNP and their colleagues leading the study group in Japan because we can have an open discussion about such things and they embrace the notion that, yes, the industries that will be served by the platform deserve to know the answers to these questions. And so we don't need to do it 100 times. Let's do it once and share.

At this time, we have reached our allotted time for questions. I would like to turn the call back over to Bruce Davis for any closing or additional remarks.

Okay. Thanks very much, and that's it for today. We'll be in touch regularly with you. Our next sort of public statements will be in terms of program basis in January at the Needham conference in New York and closely aligned with that, the NRF. And as has been true in prior years, many of our investors and analysts like to go to the show and do some diligence, and we're happy to try to accommodate that. Just a couple of words of guidance there that our Investor Relations firm, Liolios, and Matt Glover at Liolios is coordinating those activities. We welcome your attendance at the show, and we understand the importance of the show for diligence, being held at the Javits Center. We also ask that you please be respectful of our primary reason for being there, which is not to see you guys, but to try to sell something and make you happy.

So with all of that said, we'll look forward to seeing many of you in January at the show and/or at the conference. So thank you for your continuing support.

This concludes today's call. Thank you, ladies and gentlemen, for joining us today for our presentation. You may now disconnect.