DMRC

Digimarc Corporation (DMRC)

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Digimarc (DMRC)

Q4 2012 Earnings Call

February 21, 2013 5:00 pm ET

Executives

Bruce Davis - Chairman, Chief Executive Officer and President

Michael McConnell - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Paul D. Sonz - Paul D. Sonz Partners

Presentation

Operator

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

Bruce Davis

Thank you. Good afternoon. Welcome to our conference call. Mike McConnell, our CFO, is with me. On the call today, we'll review and discuss our financial results for 2012, talk about significant business developments and market conditions and provide an update on our strategy and operations. This webcast will be archived in the Investor Relations section of our website.

Please note that during the call, we will be making certain forward-looking statements, including those regarding revenue recognition matters, results of operations, investments, initiatives and growth strategies. These statements are subject to many assumptions, risks, uncertainties and changes in circumstances. Any assumptions we share about future performance represent a point-in-time estimate. Actual results may vary materially from those expressed or implied by such statements. We expressly disclaim any obligation to revise or update any assumptions, projections or other forward-looking statements to reflect events or circumstances that may arise after the date of this call. For more information about risk factors that may cause actual results to differ from expectations, please see our filings with the SEC, including our latest Form 10-K.

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

Michael McConnell

Thanks, Bruce, and good afternoon, everyone. 2012 revenues increased by 23% to $44.4 million up from $36 million in 2011. Our net income improved 46% to $8.3 million or $1.12 per diluted share compared to $5.7 million and $0.76 per diluted share in 2011. The balance sheet remains in excellent shape with more than $39 million of cash and securities and no debt, and throughout the year we made a number of strategic investments in our company. We purchased Attributor late in the year for $5.4 million in cash, allowing us to extend our media management and security offerings into the book market. We continue to invest in growth including developing and marketing Digimarc Discover, audio and packaging research and development, and developing the second wave of retained patents, all in support of our vision of enabling computers, networks and other digital devices to see, hear, understand and respond to their surroundings. And we also purchased more than 200,000 shares of stock for about $4.8 million.

Looking further into our 2012 financial results. We saw revenue growth was fueled by s payment of $8 million of past-due royalties from Verance, and from higher licensing revenues from both Intellectual Ventures and Verance, and these were partially offset by lower revenues from the suspension of operations of our joint ventures with Nielsen back in Q1 of 2012. Our gross margin at 85%, 4 points higher than the prior year, reflecting the greater mix of license revenues to the total. We experienced slightly higher operating expenses, the majority being associated with the fourth quarter acquisition of Attributor. Our operating expenses were -- I'm sorry, our operating profit was $14.6 million or 33% of revenues. And our tax provision came in at an estimated effective tax rate of 39%, yet our cash taxes for the year are estimated at only 14%. The difference reflecting utilization of deferred tax assets and benefits associated with stock-based compensation. I also should note that the federal research and development tax credit, that was reinstated January 2 of 2013 and retroactive to 2012, will not be reflected in our tax provision accounting until 2013, but we will benefit from that credit on our 2012 tax return.

For the fourth quarter of 2012, our results were pretty much in line with our expectations and the addition of a relatively small impact on revenues and costs from the Attributor acquisition. Overall, we saw revenues increased by 4% to $9.3 million and operating income rise 60% to $1.9 million.

Assessing our financial performance for 2012, we see that most of the financial planning assumptions we made at the beginning of the year were either met or exceeded. Specifically, we assumed double-digit revenue growth for the year and our revenues grew by 23%. We assumed a license-to-service-revenues ratio of approximately 70% to 30%, resulting in gross margins of 80%. The actual ratio turned out to be 76% to 24% with gross margins at 85%.

We expected to continue to invest in growth strategies, including directed research and intellectual property development, and marketing and product development of Digimarc Discover. We actually increased our investment in R&D and IP development by approximately 19% to $10 million and we further expanded our business by acquiring Attributor in late 2012, extending our media management and security offerings to the book market.

Our operating expenses would have come in lower than 2011, but we had some small costs associated with the acquisition of Attributor. And lastly, we assumed operating cash flow would be greater than GAAP earnings, due primarily to more than $5 million of non-cash charges associated with stock compensation and depreciation. Our operating cash flow ended up being $15.6 million compared to GAAP income of $8.3 million.

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