Digimarc Corp (DMRC) 2021 Q1 法說會逐字稿

Good afternoon, and thank you for participating in today's conference call. Now I would like to turn the call over to Chief Legal Officer, Mr. Bob Chamness. Sir, you may proceed.

Thank you. Welcome to our Q1 conference call. Riley McCormack, our CEO; and Charles Beck, our CFO, are with me. On the call today, we will provide a review of Q1 financial results and an update on the business, followed by a question-and-answer forum. We have posted our prepared remarks in the Investor Relations section of our website and will archive this webcast there.

Before we begin, let me remind everyone that today's discussion contains forward-looking statements that have risks and opportunities. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.

Charles will now comment on our Q1 financial results.

Thank you, Bob, and good afternoon, everyone. Before I dive into the financial results, I want to make everyone aware of 2 important changes we have made to our financial reporting structure. First, we are merging what we previously referred to as retail and as media into one market category called commercial. This change was made to better align with the structure of our sales organization to create better alignment and greater accountability. Second, we will report both total bookings and first year bookings for the commercial market to provide better insight into future revenue trends. The definition of total bookings remains unchanged and is defined as the noncancelable value of a contract over its term versus first year bookings, which only includes the noncancelable value over the first 12 months of the contract.

To provide full transparency, in our earnings script, we will provide comparative information under both the prior and new reporting structure for the remainder of 2021. We have also included a table within the script showing these comparative results for all of 2020.

Revenue for the first quarter was $6.7 million or 8% higher than Q1 last year. Service revenue increased 1% from $3.7 million to $3.8 million, reflecting growth in services to commercial customers, partially offset by a decrease in services to the central banks due to timing of program work. Subscription revenue increased 19% from $2.5 million to $2.9 million, reflecting the impact of signing a new commercial customer, which resulted in $460,000 of revenue during the quarter. The majority of the minimum contract value for this deal was recognized as revenue upfront versus ratably over the term of the contract, which is customary for most of our commercial contracts. Revenue was recognized upfront as there were no continuing performance obligations once the software was delivered. I anticipate we will see similar deals like this in the future, but I still expect most deals to result in ratable revenue recognition over the term of the contract.

Revenue from government was lower by 2% from $4 million to $3.9 million, reflecting the timing of program work with the central banks. For the full year, we still expect revenue from the central banks to grow modestly in 2021 over 2020. Revenue from commercial is up 26% from $2.2 million to $2.8 million, reflecting the impact of the contract I just referenced earlier and the impact of higher services to commercial customers in support of the plastics recycling work in Europe.

Total commercial bookings were $3 million, up 15% from $2.6 million in Q1 last year. Total bookings included $550,000 booking for the minimum fees owed under a 2-year software license for use in brand protection and traceability use cases. The contract is with the same customer I referred to earlier. First year commercial bookings were $2.5 million, up 11% from $2.2 million in Q1 last year. First year bookings included $200,000 from the same contract I just referenced, representing the minimum fee for the first year of that contract.

Gross margin for the quarter increased to 65% from 64% in Q1 last year due to improved service margins, partially offset by lower subscription margins. Service margins were 59%, up from 55% last year, due to a favorable mix in billable expenses with higher labor and lower nonlabor expenses. Subscription margins were down -- sorry, were 73%, down from 79% last year, reflecting higher license payments to a technology solutions provider. We have initial customer interest in new solutions where we do not yet have the full tech stack and are partnering to round out those offerings. These license payments are recorded as cost of goods sold.

Operating expenses were $12.6 million, a decrease of 4% from $13 million in Q1 last year. Operating expenses were lower, reflecting lower travel, compensation and marketing costs. During the second quarter, we will record a nonrecurring charge related to the separation agreement we entered into with our prior CEO. The separation agreement includes continuation of salary and benefits through the term of his employment agreement and the acceleration of stock awards that he would have earned if vesting continued for another 2 years. We are estimating the total charge will be approximately $6.2 million, which includes $2.2 million of cash-related expenses and $4 million of stock-based compensation expenses. Excluding this nonrecurring charge, we expect operating expenses for the second quarter to range from $12.5 million to $13 million.

Net loss for Q1 was $8.2 million or $0.50 per common share versus a net loss of $8.9 million or $0.74 per common share in Q1 last year. We ended the quarter with $70.7 million in cash and investments. We used $7.1 million of cash and investments during the quarter to fund the business, including $6 million in operations and $500,000 for capital expenditures. Our application for forgiveness of the $5 million Paycheck Protection Program loan is still in the process of being reviewed by the Small Business Administration. We do not have any visibility on when they may complete their review.

For further discussion of our financial results and risks and prospects for our business, please see our Form 10-K that we expect to file shortly. Riley will now provide a business update.

Thanks, Charles. I want to start off by talking a bit more about the change in how we are presenting our financial results. This change reflects both how we are now going to market and how we are now running the business. In reimagining our go-to-market strategy, we realized a prior split of our commercial business into media and retail was not only flawed in name but also flawed in focus and opportunity maximization. They are wonderful assets, including an especially human asset in the area we used to describe as media that we could be, should be and now are applying to our broader commercial effort. Therefore, the historic split no longer captured who we are or where we are going, and it was a no-brainer silo to knock down. Kindly note, we will continue to provide detailed breakouts for the rest of this fiscal year, so you'll be able to monitor our business using both old and new reporting structures on both the bookings and a revenue basis. Today's transcript provides all this information not just for Q1 2021, but also for each quarter of fiscal year 2020.

In addition, we are now also providing further transparency into the segmented duration of our bookings number because it is important for your understanding of our progress. As with everything, we are fully open for feedback, thoughts or suggestions on how we can shed further light.

I also want to provide you an answer to Jim Ricchiuti's question on the -- from the Q4 call, an answer that I would imagine many are curious to hear. We currently still expect to report triple-digit bookings growth in what we used to refer to as our retail business, although we now believe revenue growth in this area is unlikely to clear that bar. Revenue will, however, grow at an extremely high rate.

I believe bookings is the best indicator for what all of us are waiting impatiently to see, an enduring inflection of adoption. Bookings doesn't suffer from the vagaries of revenue recognition accounting rules. And moreover, it is the leading indicator for where the revenue line is going. However, while we are indeed reaffirming that we expect to grow bookings triple digits this year, I want to tell you why I think it's really not that relevant and that the only reason I'm discussing this is because we promised you all an answer, and thus, we owed you all an answer. I believe the truly exciting takeaway from today's call is how we are positioning ourselves for 2022 and beyond.

Size and scale bring a whole bunch of wonderful benefits to the forecasting exercise: a high percentage of bookings coming from renewals which are more predictable than bookings expected to come from new business, a big enough pipeline so that even the less predictable new business self forms into a smooth distribution curve and, importantly, enough history and win/loss analysis to accurately probability weight that distribution curve. With those attributes, a company can get to a statistically relevant prediction and thus give that guidance with confidence.

But specific guidance for a company that did $5.4 million bookings last year that doesn't enjoy the luxuries and forecasting I just listed, that has some large lumpy opportunities to which it is almost impossible to accurately sign a meaningful expected value and has multiple ways of customer can start adoption that -- has multiple ways a customer could start adoption that result in widely different outcomes for day 1 bookings, it's frankly just a bit of garbage in and garbage out. And I just think promising without truly high conviction does a lot more damage than good as we try every day to earn your trust.

For you to build trust in our honesty and transparency, we are best served in telling you things that fall into 1 of 2 categories: outright facts or things that are based on knowable, high conviction expectations. Internally, we focus on under promise and over deliver, and there's no other cadence I'd rather get in with all of you as well. And candidly, for all the reasons I listed, we just can't have a level of conviction in our 2021 bookings forecast that we'd like to apply in our communications with you.

On top of all that, there's something else that makes our current internal numbers less relevant. We are long-term greedy, not short-term greedy. We are not going to do a deal that leaves money on the table just to make a number. We are not going to chase business that doesn't align with our new go-to-market strategy just to make a number. And we are not going to steer a customer to a paid upfront contract, which delivers a bigger day 1 booking number that comes at a discount versus a pay-as-you-go contract, which understates contract size day 1 but allows for a larger total dollar size deal just to make a number. Do I think we'll grow bookings triple digit? Yes, I do. It's just the logical outcome based on our pipeline and the level of engagement we have across the globe. There are many ways to get there. We have the skill team in place to execute on the opportunity set, and there is significant upside potential even above our current internal point estimate.

So if we can just ignore for a minute the arbitrary digit count hurdles, here's what I do feel comfortable committing to you. We will grow bookings significantly.

Okay, with those 2 housekeeping items out of the way, I want to turn to what I believe should be the most exciting part of this call, which is sharing with you how we are switching our go-to-market strategy in order to build a scalable, sustainable, high-growth and high-margin solutions business, one that should allow for a shortening of the time to meaningful gross profit dollars while also increasing our trajectory for years beyond that point.

Before I give you the output, though, I want to spend some time on the input. Very high level, and to use software terms, I believe there have been 3 Digimarc releases. Digimarc version 1.0 was a bunch of really smart people with a game-changing technology who have the common innovator's curse of trying to predict where the demand would come from and then taking the first steps to get there. While a natural place to start the go-to-market journey, the problem every version 1.0 company has is a truly great, right scalable opportunities are sold -- are not sold, they are bought.

It is really hard to convince a large customer that they have a problem and try to prove to them that you can solve it. It requires predefined and static pricing, finding the right audience and then defining the right ROI tests. It also requires ad hoc reactionary adds to the tech stack versus customer-driven and data-informed road mapping of your product. This isn't scalable, and it's not margin friendly.

Digimarc version 2.0 was released when a few visionaries in their field heard about what we were doing, came to us and said, "I have a problem. From what I understand of your technology, I think you might be able to solve." If in our business planning post that first conversation, we can ascertain that this problem is not prospect specific, and thus the TAM is large and our soft could be universally applied, then we have the spark of scalability and, importantly, the spark of high-margin scalability. In addition, because Digimarc 2.0 customers are coming to us with a problem, the proof we can solve that problem is easier to provide. And wonderfully, they most likely already have a line item in their budget for a solution to their problem. It also allows us to be more thoughtful in how we price because our solution could be priced based on the value it provides, not some arbitrary price per GTIN.

The $50 per GTIN pricing model almost always leave some value on the table. In some cases, that value is measured in orders of magnitude. That's orders with an S. For Digimarc 2.0 customers, the $50 per GTIN pricing construct will be almost irrelevant going forward. Our pricing will be higher when viewed from the standpoint of this arbitrary metric of price per GTIN because we are selling a solution, not a GTIN. This is especially true for Digimarc 2.0 solves where serialization is a key ingredient.

And then for true scalability, there's Digimarc version 3.0, our newest release. Digimarc 3.0 is when a happy 2.0 customer becomes a Digimarc champion, reaching out either across divisions or geographies in his or her own company or, in some cases, reaching across the aisle of the competitors and saying, "We're seeing this type of ROI with Digimarc. But we believe if we adopt this as a wider solve, that ROI will be even higher." Our work in sustainability is the most public example of our version 3.0 release, but there are others earlier in the process. Digimarc 3.0 is currently the version to which we want to get all of our products and all of our customers to migrate.

I say currently because there is a Digimarc 4.0, which involves data analytics, but it's still in the ideation stage, more on that if and when relevant. Digimarc 3.0 allows us to really road map our products. It allows us to fully lean on our wonderful partners so we can deliver enduring triple win: customer, partner and Digimarc. It creates powerful network effects that allow us to iterate with our customers because we moved up a level in terms of our relationship with them, from supplier level to partner level. It allows us to really consider where else in the stack we can provide value because we can fully grasp what solutions our customers are seeking, not just the product. And this is incredibly important because if the history of tech has taught us anything, it is that while people will make do with tools, what they really want is solutions. To be fair, a lot of these features are available in 2.0, but it is in 3.0 they become truly impactful to our business.

With the release of 2.0 and, more recently, 3.0 then, we have the opportunity to reinvent who we are and how we set our priorities. It is a massive unlock for us in terms of both time to and scope of future value creation, and it is the way forward. We are customer-obsessed and customer-driven. Customers have to provide the answers to almost every question we ask ourselves. We are upgrading our CX in a bunch of simple ways so we can provide an intuitive, consistent and customer-friendly way to do business with us, no matter what entrants you have chosen as the starting point to your Digimarc journey. We are becoming and will continue to become easier to do business with in multiple different ways because great CX is the byproduct of customer obsession.

We are guiding our business based on data, not guesses, not gut. We are no longer chasing lower margin development deals solely for the current bookings they would provide, so we can free those otherwise booked internal resources to focus on vision and road map. This discipline will allow us to capture bigger and higher-margin bookings in the not-too-distant future. To this point, and to be clear, if we can work with a potential customer or partner to build a business plan that proves out signing a POC or entering into a base level partnership agreement helps us accelerate our road map, we're in. And we still want to hear, meet and claim with anyone interested in doing so as we realize we don't have a monopoly on great ideas or on amazing technology. Not invented here is not welcome here. But if you're a customer that wants to perform a POC for an offering that is already fully baked, we completely hear you and we fully respect your process.

After you've done whatever it is you need to do to complete your POC and are ready to go into production with us, we will be here ready and eager to every day win your business, and we can't wait to reconnect. If you're a partner that wants to pay us a small fee to get onboarded just to check a box or to put out a press release with us, we are honored and thrilled you are as excited as we are by our future. But we are focusing our internal resources on delighting partners with whom we've road-mapped the path to wonderful triple-digit deals in the near future. Those partners and our soon to be delighted shared customers deserve our laser focus. In other words, before we chase rainbows that might help with 2021 bookings but aren't obvious accelerants to road map solutions, we are now taking the time to ascertain if there are indeed giant pots of gold on the other side of said rainbow and not just a few gold coins along the way.

Moving up a layer, across the whole company, we are questioning every assumption and being patient to come up with the right answer. "Good enough" and "This is the way it has always been done" are no longer answers we need to accept. I have promised my teammates 1 thing above all else, and that is that we will allow for focus, not fire drill.

2022 and beyond will be much better if we take the time to do things right, starting today: acting with the wonderful freedom to plan, not react. Mid-race then, we are, in essence, shutting down our bolus to get a go-to-market engine, one that was cobbled together as one might expect from a company on a version 1.0 release, and we are in process of building a Space-X engine to replace it, one we will have ready for 2022 and beyond. But here's what's amazing about this company: is technology, is opportunity and every single teammate on this team. We're going to make this hot swap in such a way that if we didn't just tell you we were going to do it, you wouldn't have known that it happened. Instead, you would have just noticed the outcome we expect this upgrade to have, which is an enduring inflection to a truly scalable, high-margin customer informed and customer-driven solutions company that is changing the world in many different ways. Because on this side, the team has built this auxiliary engine of on-the-truck products and pipeline that will carry us across the checkpoint of 2021 without forcing us to pull into pit row. I am in awe and, frankly, all of you should be as well.

Starting on our Q2 call, I want to begin introducing you to the internal leaders that are actually creating all this magic. As I said 2 Mondays ago, my confidence in this opportunity started with technology but grew infinitely once I got a first-row seat to the level of talent throughout this amazing team. I know when you get to spend time with them, on these earnings calls and a much reimagined Analyst Day that I can't wait to get organized, you will see with your own eyes why I'm so confident.

So I will stop there and save a further description of the impressive details underlying all the above until then, because I want you all to be able to dialogue with the visionaries that are actually behind them. In the meantime, of course, we are happy to answer any questions you might have on this subject during the Q&A session at the end of our prepared remarks. And as I said 2 Mondays ago, I don't expect you to do anything but judge us on the results.

Three last things before we turn it over to all of you for Q&A. First, I promise you consistency of message, and there was just too much level-setting necessary to really start that process today. I don't believe a series of shiny anecdotes tells our truth or provides you any value. You need a framework so you can follow threads across quarters. That is the only true way for you to monitor our progress and begin to extrapolate where we are going. Plus a series of shiny anecdotes often reflects a true lack of focus internally, and we are not lacking focus.

But that being said, there was also too much goodness that happened since our Q4 call to not give you a quick update on some of them. And hopefully, it's clear how each of these aren't just snapshot anecdotes or vague promises of what could be but tangible stepping stones to our future. Any and all open threads you have from prior calls, bring them up in Q&A, we'll help you connect the dots there.

First is a wonderful partner of ours PACCOR announced in a customer event they held just last week in the city of Hamburg has greenlit the full-scale commercial test of all packaging types PACCOR offers, with the objective being to prove the power of applying Digimarc technology as a means to dramatically improve plastics recycling sortation. This is the first golden thread we are able to discuss and should work in parallel with the efforts of AIM and HolyGrail 2 as well as other golden threads yet to be announced to prove beyond a shadow of a doubt the planet-saving benefits of our technology.

Further to that point, I encourage everyone to keep an eye out for PACCOR's annual report coming in May, which will include a scientific study of the benefits of Digimarc's technology. Thank you Nicolas and team for everything you do. Our partnership is the role model of what all corporate partnerships should be. And together, we will save the planet, hashtag digipac.

On the AIM, HolyGrail 2.0 front, the membership continues to grow in both number and global thought leadership. And the base plan for Phase III, including test markets and packaging formats, has been locked by the leadership team. It will be publicly announced soon. I fully understand the excitement and curiosity surrounding this potentially game-changing endeavor -- world-changing endeavor, but I remind everyone, this is not our truth to tell, so we ask you to kindly respect that fact as hard as I know it is.

We also closed a deal with Practical Methods, which has 5 things worth highlighting. First, it is one of the first big migrations we have done of an HP linked customer and sets a template for how we can migrate more of those customers. Secondly, the customer committed to 8 figures of serialized code, which would give you a sense of how scalable this business can be. Third, Howard and his wonderful team are based in South Korea, adding a new flag to the Digimarc map. Fourth, the end customers being targeted are heavily cosmetic and beauty, a vertical in which we are just scratching the surface. And fifth, and most importantly, Practical Methods is a fantastic company that is doing wonderful things, and we are thrilled to be associated with them and more powerfully call them a partner.

Another fantastic partner of ours, MCC, recently completed a 7-figure production run of serialized labels using a hybrid print technology. This is the first at-scale commercialization of our serialized offering using this cost-efficient hybrid technology and opens up a whole other tier of the market that can benefit from our solutions around item-level traceability. As impressive as it is in so far as what it means for TAM expansion, we are equally as thrilled by who's packaging these labels we'll adorn. The customer, a large fresh food CPG company, allowed us to pass along this message to all of you, and this is their quote: "Over the last few years, we made significant strides adapting the Digimarc technology into brand image, and we now look forward to propagating it across our SKU portfolio." This production run validates that our technology scales in a cost-efficient way. Moreover, thought leaders are adopting.

And last, like the Brooklyn Nets, we just keep adding all stars to our already impressive roster. I mentioned on the last call all of the wonderful talent experience and perspective we've added at the Board level. But at the company level, we've been busy as well. We've added wonderful talent across the board, including 2 new senior executives, Tim Price, CRO; and Kelly Haggerty, CPO. As a product company, trying to get the big revenues, these are 2 positions we had to find experienced all stars to fill, and I'm thrilled to announce that mission was accomplished.

Second, I want to share some feedback on what I've learned in the last 2.5 weeks. I've been meeting with as many teammates, partners and customers as make the time for me. And I want to thank them all for their trust, their time, their trust and their candor. In these last 2 weeks, I grew taller. The consistent message I heard from customers and partners when I asked about what we could be doing better is just do what you promised us you'd do, new guy, make this transition seamless because we love the teams who we are working with at Digimarc. Don't you dare mess that up.

The message I heard from teammates was a bit more varied and touched on quite a few different topics. And it was downright inspiring to have the kind of honest and transparent dialogue I was fortunate enough to have with so many passionate people. Importantly, the single constant I heard in each and every conversation was the love they have for the company and the love they have for the people who work here. A message oftentimes said overtly but in any case was woven into all the wonderful ideas people shared with me regarding ways to make us better.

I want to brag a bit about my new teammates because they deserve to be bragged about. This team is tough, it is smart and it is passionate. It is a team of rockstars dedicated to changing the world. I heard quotes like I came for the tech, but I stayed for the people, which just about sums up all my conversations. The level of honesty and transparency they gave a level of CTC-ness, and you have to apply to one of our open racks to know what that means. The level of CTC-ness I repeatedly heard made me realize just how lucky I am to be a late-season trade to this amazing team.

Every company has its beauty marks and its warts. Normally, the people inside a company seeing firsthand how the sausage is made, tend to see much more the wart and much less so the beauty marks. And that's just not the case here. The best way I can describe the spirit and belief of my new teammate is that if I could somehow copy and paste the internal view about our future to partners, customers and investors, we'd have millions of partners, billions in revenue and trillions of market cap. My teammates and their unshakable belief in us is a foundation on which all the aforementioned will be built. And my biggest takeaway from these last 2.5 weeks, that foundation is world-class and it's miles high.

And then finally, I want to share a question someone asked me last week and my answer to him because while some might call it a stretch goal, it is what loops through my mind every day on endless repeat. He asked how I would define success for Digimarc. And I told him the answer lies on 4 axes. One, we are considered the single-best company organization anywhere in the world for which to work. We are considered the single-best supplier partner of any company in any industry anywhere in the world. Three, we never run out of really high ROI ways to invest a portion of our prodigious amount of free cash flow and thus aren't returning all of it, just a large percentage of it, to our owners. And then lastly, every single stakeholder Digimarc can probably tell their kids and grandkids that, yes, they actually were Digimarc stakeholder and, yes, it did change and continues to change the world.

As with everything, judge us on our results. So with that, we'll open up to Q&A. We want to try the same format as the last call but hopefully there'll be a few more questions this time around. We have not set a hard stop, and we'll be here for a while, and everyone will have a chance to ask your question. However, for us to be able to continue this slightly different Q&A format, we do ask that you keep it professional. Again, not asking you to take it easy on us, you guys own this company, just asking you to keep it professional. Operator?

(Operator Instructions) Your first question is from an investor named [Harvey Mordka].

Could you go into a little bit of detail on the number of shares? We had 12 million this time last year, and we're up to 16 million now. And then also, if you could address the number of shorts, where like 15% of our outstanding stock has been sold short.

Yes. Well, let me address the share count. That's my fault. We bought 3.7 million shares. So that's the share count. Charles, I mean, any other comment on that?

Yes, 16.9 million shares outstanding.

Yes. So your numbers are a little bit off, but 3.7 million of that was me and my wonderful LPs. On the shorts, do you want me to confirm the number that you said? Or what's your question? Why are they there?

Yes. Why is 15% -- why do so many people want to be shorting us when there's such a wonderful opportunity out here?

I don't know. I mean it's a great question. I honestly don't spend that much time on the shorts, and I'll answer it. If Charles or Bob, you want to join in. But the best way -- shorts perform -- there's nothing wrong with shorts, right? They're just doing their job. Our job is to show them, at least in this case, they're not very good at theirs, right? So the best way to beat the shorts is 1 contract at a time, 2 contracts at a time. And the best way to get rid of them is to execute. So we do care about the stock, obviously, for many reasons. One, it's a retention tool for the team. And recruiting and maintaining a fantastic team is one of my #1 priorities and all of our top priorities. It's a currency for acquisitions if that's ever something we consider going forward.

And importantly, too, I get it. It's a price where our owners have to transact to buy and monetize, right? This is your entry and exit price of Digimarc is the price of the stock. But candidly, I kind of always hope we have a high short interest because that's a great shock absorber. And shorts are just people that, at some point, have to buy your stock, right? There's a lot of people on this call or out there in the world who don't ever have to make a decision to buy Digimarc stock. Shorts eventually have to buy our stock, if we prove them wrong. So that's my thought on the -- that's probably more than I thought about it in the last 3 months.

Okay. Will you be moving to Portland? Or are you going to still operate out of Florida?

That's a great question. I actually just signed my lease today. I'm not going to move full time. I got a 10-year-old and 11-year-old and they're in school here, but I'm going to be logging a lot of miles in the air. And also, I don't just want to come to Oregon, right? I mean it's very important to spend time with the team. But there's a lot of our business that's happening elsewhere in the world, and there is nothing that would make me more happy than to get on a plane and go visit customers and suppliers and partners. It's a little difficult. Still, people don't really want to do face-to-face meetings. So I'm spending a lot of those meetings on Teams or Zoom. But yes, I'm going to probably get platinum status pretty quickly here on the plane.

Okay. Will you be getting a national PR company?

I'm sorry?

Would you be getting a national public relations company to promote?

So all sorts of communications, Investor Relations, corporate commutations, government relations are a big focus of ours. And that's what we're working on.

Okay. Look forward to many more years.

Fantastic. Me too.

And your next question is from [Drys Upperton with Ochoa Capital].

The GTIN, or the pricing as viewed through on a per GTIN basis. In light of your confidence that, that will be north of $50 when you calculate that and my understanding is there's tens, if not hundreds, of millions of GTIN out there, is it fair to say that you're looking at billions? I don't want to pin you down on an exact number, but something in the billions on HolyGrail 2.0?

So we haven't talked about our pricing for recycling application, right? My bigger point was in almost every case that I'm aware of, which is a lot of cases, if we can move -- in version 1.0, it made sense because we were trying to replace the GTIN for front of store, right? That was sort of -- it was a natural metric with which to anchor pricing. But as we evolve to 2.0 and 3.0 where we're solving problems and not selling GTIN, we can do it at a value-based pricing. And so obviously, we're not going to proactively pre-release what our pricing schedule is. And there's -- every pricing contract needs a negotiation, right? But I stand by with what I say is, I can't think of very many applications anywhere where the pricing, when viewed from a different metric than an arbitrary number per GTIN -- again, I try not to talk about sustainability, but think about some of the products out there and how many billions of units are sold, right, that have plastic in them, right? I think we're adding more than $50 if we can recycle some of those.

So it's not -- yes, at some point, we would probably do a post mortem and back in and say, well, what does this mean on a per GTIN basis, but that's not where our head is. Where our head is right now is what is the problem, right, try to quantify that as best as we can, working with customers, in some cases, right, what is the problem, what is our solve and what percentage of that could we take. And the GTIN is almost -- it's just not relevant. But, what I would say, [Drys], maybe another answer to your question without answering how we're going to price recycling, yes, it's a massive, massive opportunity.

Okay. I'll wait for the Analyst Day on more specifics, I guess.

As our next question is from Jeff Van Rhee with Craig-Hallum.

This is Rudy on for Jeff. I want to start with the 1 customer that contributed the $460,000 in the quarter. I think you just said it was a commercial customer, unless I missed something. Was that a media or retail customer? What was the use case? Just any more color that you can give on that one.

Yes, Rudy. That was what we would have previously classified as a retail customer. And so their focus is around brand protection and traceability.

Got it. And so there's no significant ongoing recurring stream from them, this was more a onetime license deal?

So that's the minimum value of the contract. So they made a certain level of commitment. There is potential upside that would get recognized as that upside is realized.

Yes. And Rudy, this is an ongoing -- this is -- we didn't do like a onetime deal, if that's your question. This isn't some license payment. This is a revenue recognition issue -- or not issue. As Charles said, this would be normally recognized over time because of the specifics of this contract. But this is an ongoing relationship, we hope, continues for years and grow, as Charles said.

Yes, the $460,000, it's basically a minimum price for 2 years. So beyond 2 years, there's opportunity. But even within the first 2 years, there's opportunity for upside.

Got it. The golden thread, you talked about, Hamburg, what more specifics if you have any, that you could share at this point? I know you said -- or you're talking PACCOR in the report in May. But with Hamburg, just what are the initiatives from here with them over the next 12 months in terms of testing? Have they laid out any specific time lines yet?

Bob, do you want to take it and answer that?

Yes. It's still in the early planning stage. The environmental climate, energy and agricultural authority of the City of Hamburg is working with 4 partners, of which we are one, to put a plan together. And there'll be participation by Hamburg Technical University in developing the project study. So let's look at it as early stage planning for deployment later in the year. And the primary focus is on proving up the ability to both identify and sort the various forms of plastic polymers to increase the quantity of recyclate they can pull out of the waste stream and to improve the quality of the sort. So that's kind of the nature of the project.

Yes. And really, the significance here is there's multiple groups forming to prove our technology as the solve for this, right? There's no single group. There's multiple groups that are being formed and running tests and trials that are running simultaneously to get to the same answer. So this is -- as I alluded to, there's other golden threads that we cannot yet talk about. But there's more than just 1 test of our technology as the answer for plastics recycling.

Got it. And then just one more. I know you talked about sort of revamping the whole go-to-market engine and have that ready next year and beyond. Just what are your early thoughts on what that looks like? I mean what does it look like now? And what do you guys want to change and transform it into?

Sure. I'm glad you asked that question because I must have misspoke. It's already happening, right? My only point was we are changing how we go to market as we speak and actually have been. But because of this auxiliary engine we have, you're not going to notice it in the booking. I mean, again, we -- and again, I don't want to harp on it too much because, as I said, to me, it's not the exciting part of this call, we're reaffirming that we believe that we will do triple-digit bookings for this year, right? But at the same point, we're completely changing how we go to market. And that's what I -- when I saw this, right, this is what I get so exciting about this opportunity.

So how exactly we're changing the go to market, I talked about, right? We're being driven by data. We're customer obsessed, right? We focused our resources on opportunities that are part of the road map we're planning. So as opposed to -- which is a very version 1.0 of any company where you're kind of feeling out what the market is. We're at the point now where we have an opportunity, and I don't say the luxury, but call it the benefit of planning and being thoughtful in how we build our products and build those products into solutions and what business we're taking on that further -- and partnerships we're taking on to further that goal. So it's a little bit more -- when you ask what it looks like, I can get to specific details. What I'd love to do on the next call is bring Tim and Kelly on the call, so you guys can talk about -- think about what they're doing in the organization.

And again, it's not just the sales and product, right? I mean, obviously, for any organization to work well, the wheels, the cogwheels have to all work together. So every -- every functional group of Digimarc is going through these amazing, I don't want to call them upgrades, but they're empowered to change to become the organization that we know we are. And so -- but where it's most prevalent on the go-to-market side with kind of the tip of the spear is on product and sales. And if you have specific questions, again, Tim and Kelly will be on the next call. But it's everything I talked about, right? It's being customer obsessed, becoming easier to do business with. It's not chasing deals just because they bring some bookings into 2021, it's planning, it's data-driven decisions.

Got it. And then just lastly, if I could sneak the last one in here. Any updates on Walmart, either to count a number of packages that they've tagged or just any expectations on when they rollout thermal labels?

I don't know the number, excuse me, I don't know if we talked about that. Charles?

Yes. We normally don't. That's their business. I think what we've highlighted before, Rudy, is that they're continuing to enhance packaging. There hasn't been any disruption in the work that we're doing there, but we're not going to give regular SKU count updates.

Yes. And I'll tackle the second part, right, which is -- part of the beauty of this business model is also part of the risk, which is there's always going to be some go-to-market partners, right? Even as we build out our solution stack, there's always going to be adjacent tech or adjacent products that we touch, right? And so you've heard the history here that this was an issue outside of our tech stack, right? Now we could give up, right, or we can say challenge accepted and turn what could have been a defeat into victory. And if you're paying attention, I think you know the caliber and toughness of this team, so you can make your own conclusion on which route they chose. So setbacks become opportunities.

So there's 3 things working with us with Walmart, right? Is it -- they're an awesome corporate citizen and every day doing the best thing for their stakeholders, not just for shareholders but all their stakeholders. There's a lot of arrows we can provide to their quiver, and we're heads down focused on all of our customers. So we actually brought in a consultant a few months ago is when he started his work to really help us take -- to make sure we're maximizing all this opportunity with this wonderful customer of ours, right? I mean we're so aligned. Walmart is so focused on doing the right thing as a corporate citizen, and there are so many tools that we have that could help them.

And what's wonderful about this work and this reinvigoration of what we can provide to Walmart is the output of the study, and this goes back to the go to market, right, this is the planning as opposed to kind of weaving our way through it. Let's take a step back. Let's look at what Walmart wants. Let's look at what we have, and let's really study this with Walmart, right? And so I think the output of this -- who knows, right? But I think the output should be a great win for us with Walmart because we're going to get closer to our customer, right? The goal, again, we want to not just be a supplier, we want to be a partner.

Secondly, what we've learned during this process is back to the planning, right? Now what we've learned, we can take this process and apply it to other retailers. And then the last thing is this is a process that is wash, rinse and repeat, right? Once we've done this deep dive in how do we really understand and work with the customer to understand where we could be going with them as a solution provider, that's a template we're going to have internally now forever, and we can use it for other people as well, besides just retailers.

(Operator Instructions) Your next question is from Robin Knipp with Janney Montgomery.

So Riley, you partially answered the question that I was going to ask about understanding the sales culture of Digimarc and how effective it's been, where we've come from, where we are and where we're going. And what I heard you say was if we can wait until the next quarterly call and get Tim Price on the call, that would be helpful just to have a better understanding. So let me just skip to my second question, if I may. And that is, I recently attended the World Intellectual Property Day 2021 sponsored by the U.S. Patent and Trademark Office, during which I was able to hear Joel Meyer, who's the EVP of Innovation Specifications and Standards speak about the value proposition that digital watermarks can bring.

So during this time, a statement was made by another one of the panelists. I think it was Frank Upton who said, intellectual property is probably the most valuable asset in anyone's portfolio. So given our very robust and unique patent portfolio and our unique technology that we bring to solutions, can you help us understand how we should be thinking about how to value our intellectual property?

Yes, you know what I get to say now, Robin, that's your job, not mine, right? Unless we're looking to monetize it, it's not my job. And Bob would probably cut me off if I tried to do that anyway. There are so many levels of good news here, right? And our IP is a massive one. But it's only one, right? So IP is, I guess, maybe the bedrock of which all value can be built. You can build a lot of value and technology without strong IP, you can, right? You can also build nothing and have a lot of value in IP. What we're doing here is both. What that turns into what multiplier effect that is on -- even if I could take a guess to the value of the IP, I'm not going to. But then with everything we're building around it -- there's a slide deck on the -- on our homepage, right, that has -- is an introduction to whatever. And I forget what slide number it is, but there is -- where we list the moat -- sorry, I forget how we reference it. But to me, it's sort of like why there's so much -- so many layers of value. And actually, it's -- I think it's concentric circles is the way we represent it.

IP is one part of it, right? There's massive value at H1. So I would challenge you and say, Robin, don't just stop at figuring out the value of the IP, figure the value of every other moat in that stack.

That's fair enough. I just -- the reason behind the question is really as much a function of what's it worth. But also the IP portfolio, we've got patents that run off at a certain point in time. With over 1,150 patents issued and pending, I have no clue what the patent runoff sunset looks like.

Yes. Well, that's only one of our moats, right? So that's my point is you can have a lot of value and technology without IP. Using patents, in particular, is a priority, right? And so here's the thing. A couple of ways to answer that, right? Number one is, if we're not constantly patenting new things, we're not doing our job. And Joel is not doing his job. And I know Joel does his job very, very, very well, right? So one is, of course, patents run off, right? And if our only moat, if our only single moat was patents, yes, in 20 years, maybe somebody could be where we are today with our tech stack, right? But our job is to stay in front of that and to constantly be innovating. But the IP protection, the patent protection is only one layer of that protection, right?

So something we're obviously very focused on, something that Joel especially is very, very, very focused on. But it's just -- this is what I'm saying, that -- if you go to the website and look at that deck, it's just one part of this concentric circle and the stack of moats that we have.

Your next question comes from an investor, [Matthew Chen].

I have a specific question and then a more general question. Specifically, I'd like to focus on the Practical Methods customer. And I'm wondering, is my understanding correct that on the income statement, the revenues there would show up on this -- in the new subscription category and not the service category?

That is correct.

Okay. And then have revenues appeared on the March statement? Or do you expect it to show up in future statements?

Most of it was recognized in Q1. So that's the -- well, I should say, on that particular contract, yes, we won't get into on those specific contracts on individual customers.

Okay. Fair enough. Right. So -- and then it's exciting because you said it's -- there's a minimum commitment of 8 figures. So is my understanding correct that 8 figures refers to tens of millions...

Serialized codes, so we're not going to price it with any -- so serialized codes, meaning serialization, right?

Right, tens of millions of codes, correct?

Yes, correct. Serialized codes. So you understand -- so again, that's different than the $50 per GTIN, right? So this is...

Right, right. Understood. Understood.

Which is kind of my point. Let me take a quick -- so not talking -- I'm talking completely generically, right? So nothing about Practical Methods, right? In general, if we have a contract for serialize -- and you know what I mean by serialized codes?

Right. I mean, just like you said, for the HP Link where you can have an individual code for an individual package to enable tracking.

Right. So take product XYZ, right? Let's say, so product XYZ under the old rubric of thinking about, might be $50 for XYZ's GTIN. But if they sell 1 million items, we get -- and if they're serialized, it's per item. That's a serialized code, right? So back to my point, and to [Drys'] question about how to think about different pricing metrics, I have no idea, to be honest, on the Practical Methods that the 8-figure code -- how many GTINs that might represent, how many different products are going on. But I would assume -- I don't know this, and it's not really my place to share even if I did know it, that if you did the math on that random metric of GTIN, it would be higher than $50. So serialized code just means an individual item gets its own code.

Right. Right. Understood. And they want to track tens of millions of items, right?

At least. Remember what Charles said, that's the minimum. So -- and Practical Methods and Howard are absolutely fantastic. Fantastic company and a fantastic team. So I would like over time that to go up because they're a great company, and we're happy to have them as a partner. So their success is our success.

Right. And that also shows the power and the correctness, right, of your switch to value-based pricing, right, because obviously, no one would pay more than they think it's worth. And the real difficulty is convincing the customer that getting to agreement with customers on the value of the solution, right? And that's where it takes off. And that gets to my second question, which is do you believe in the hockey stick model of earnings? And if that is what's in your mind, where do you think we are on the hockey stick at the moment?

It's a great question. It's a great attempt. I don't know. I mean literally -- I wasn't just throwing random words at the beginning of this call where I said there's a lot of reasons why it's really tough to forecast this business, right? There is size and scale issue that any company our size would face. But then we have these other really big complicators or things that are -- that make it even more difficult. First of all, we have very large, lumpy opportunities, right? I don't know how to expect -- those are very tough opportunities to put an expected value on, right? But the other thing is there's other -- there's multiple ways to come to market with us, right? So somebody can say, hey, listen, here's what we think we're going to use over X period of time or whatever. I want to sign an enterprise license today and liquidate some of that value. So I'm willing to pay you upfront, right?

And obviously, as you'd imagine, somebody pays up front, they're probably going to get some discount. And the other way is to say, yes, we're fully in, but we're going to pay as you go. We're going to pay as you roll out, right? And then that, obviously, has a wonderful impact at full scale, that contracts bigger than if they paid an upfront license -- or not upfront, and upfront booking if they did an enterprise deal. But it takes longer to hit. So it's not just a matter of trying to nail the timing, you would also be trying to understand where exactly and how these different contracts are going to come in. Plus, again, I think if I try to answer that, Bob would probably disconnect my line, so I'm not going to try.

Okay. Well, good enough. I mean, obviously, I feel very optimistic about what I'm hearing on this call.

Oh, that makes 2 of us. Hopefully, at least more than 2 of us, but thank you for that. Yes, I agree.

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. McCormack. Sir, please proceed.

Well, I'm glad there were more questions this time than last time. Thanks, everybody, for dialing in. And ironically, I'm just looking at the clock now, it ended up being an hour anyway. But I really do appreciate you guys dialing in and we look forward to updating you guys in the future. Take care. Have a good night.

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