Digimarc Corporation (DMRC)

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Digimarc Corporation (DMRC)

Q1 2013 Earnings Call

May 2, 2013 5:00 p.m. ET


Bruce Davis – CEO and Chairman

Mike McConnell – CFO


Bill Gibson – Legend Merchant

Paul Sonz – Sonz Partners



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 Q1 results, talk about significant business developments and market conditions and provide an update on our strategy and operations. This webcast will be archived in the Investor Relations section of our website.

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

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

Mike McConnell

Thanks Bruce and good afternoon everyone. As we reported a year ago Q1 results last year included an $8 million revenue amount for past-due royalties received from the settlement with Verance. While total revenues in Q1 of 2013 decreased by 40% to 10.2 million from 13 million in 2012, our revenues, excluding the Verance settlement, increased by 13% year-over-year.

Our net income for the quarter was $1 million, or $0.13 per share on diluted basis and the balance sheet remained in excellent shape with more than $40 million in cash and securities and no debt. Q1 results included the first full quarter of operations related to our recent acquisition of Attributor. We made significant progress in integrating the Attributor team and its operations into Digimarc. We also continued to invest in our growth initiatives, including developing and marketing Digimarc Discover, audio and packaging research and development and developing the second wave of patents, all in support of our vision of enabling computers, networks and other digital devices to see here understand and respond to their surroundings.

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

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

Our gross margin was 79%, 10 points lower than the prior year reflecting a greater mix of service revenues to the total where our Q1 last year included a high margin past-due license royalties from Verance. Operating expenses were $6.5 million, being 6% higher than the prior year with most of the increase due to the first full quarter of operations for Attributor and continuing investments in developing and marketing Digimarc Discover, audio and packaging, research and development and developing our second wave of patents. Our operating profit was $1.6 million or 16% of revenues and operating cash flow was $3.4 million or 33% of revenues.

In our last call, we indicated that revenues are likely to be lower in 2013 compared to 2012 primarily due to the $8 million of past-due royalty revenues from Verance in Q1 of 2012 and the quarterly license payments from intellectual ventures ending in Q2 of 2013, partially offset by expected growth in revenues from the acquisition of Attributor, our new agreement with central banks and increases from other customers and new customers in other areas of our business.

We continue to expect the financial results will be below last year’s levels. Since the last conference call we decided to increase staffing in R&D, marketing and intellectual property beyond the levels contemplated in our annual operating plan to accommodate additional growth opportunities that have arisen since the adoption of the plan. Our headcount in December of last year prior to the Attributor acquisition was 107. Taking into account the 19 employee that came with the acquisition, hiring to our annual plan and hiring to accelerating certain investments in R&D, marketing and intellectual property, we expect permanent staff and consultants to exceed 150 by the end of Q3.

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

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