DMRC

Digimarc Corporation (DMRC)

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Digimarc Corp. (DMRC)

Q2 2010 Earnings Call

July 30, 2010 11:00 am ET

Executives

Bruce Davis - CEO

Mike McConnell - CFO

Analyst

Bill Gibson

Walter Schenker - Titan Capital Paul Sons - Sons Partner

Paul Sonz - Paul D Sonz

Kevin Capital Advisors

Presentation

Operator

Good morning. My name is Celeste, and I will be your conference operator today. At this time, I would like to welcome everyone to the Digimarc Second Quarter 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session (Operator Instructions)

I would now like to turn today’s call over to Mr. Bruce Davis, CEO of Digimarc. Please go ahead, sir.

Bruce Davis

Thanks, Celeste. Good morning, everyone. Welcome to our earnings conference call. Mike McConnell, our CFO, is with me. We are pleased to discuss our second quarter 2010 results, which were issued in a press release this morning.

The objectives of this call are to summarize and comment on these results, review significant business developments and market conditions and provide an update on strategy and operations. This webcast will be archived in the “Investor Relations” section of our website. We expect to file our 10-Q with the SEC later today, providing more details on the financial results.

Please note that during the course of this call, we’ll be making certain forward-looking statements. These statements are subject to many assumptions, risks, uncertainties and changes in circumstances. Any assumptions we offer about future performance represent a point-in-time estimate. Actual results may vary materially from those expressed or implied by such statements.

We expressly disclaim any obligation to revise or update any assumptions, projections or other forward-looking statements to reflect events or circumstances that may arise after the date of this conference call.

For more detailed 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 we’ll file later today and our earnings release posted on our website this morning.

Mike will summarize and comment on the financial results for the quarter. Following Mike’s presentation, I’ll return to discuss some of the important events and achievements during the quarter and provide an update on strategy execution. Then we’ll open our call to questions.

Mike?

Mike McConnell

Thanks, Bruce, and good morning, everyone. Thanks for joining us to discuss our second quarter results. Our revenues for the quarter increased 21% to $5.2 million, up from 4.3 million for the same period last year. This increase reflects higher royalties from some of our licensees as well as higher service revenues from both Nielsen and the central banks.

Our gross margin grew to 71% compared to 65% in Q2 of 2009. The increase reflects a mix of higher license revenues to the total as well as benefits realized from improved operating leverage in providing our services.

Operating expenses increased 13% to $4.1 million, up from 3.6 million in the second quarter of 2009, and the increase reflects investments - primarily reflects investments in our product development and our IP marketing initiatives.

Our operating loss totaled $400,000, a 50% improvement over the $800,000 loss in Q2 of 2009, and this improvement reflects the benefits of both higher revenues and associated operating leverage.

Our net loss was $900,000, or $0.13 per diluted share, compared to a net loss of $700,000, or $0.09 per diluted share, in Q2 of 2009. $600,000 of the current year loss reflects our share of operating results from our joint venture investments with The Nielsen Company.

Operating cash flow was $500,000 and improved $1 million compared to the second quarter of 2009 due to improved operating results and continued good balance sheet management. We entered the quarter with nearly $47 million in cash and investments, up about $3.8 million from the end of the year.

We continue to prudently invest in our growth strategy, including $700,000 of equity contribution in our early-stage joint ventures with Nielsen and incremental spending on IP marketing initiatives to expand our licensing program.

For a further discussion of these results, our business and financial models, and risks and prospects of our business, I refer you to the Form 10-Q that we will file a little bit later today.

Bruce will now provide his comments on our outlook and execution of strategy. Bruce?

Bruce Davis

Thanks, Mike. Our financial and operational accomplishments during the second quarter are a great start to the year. The 20% plus growth in revenues in Q2 was encouraging. In the quarter, we focused our R&D on improving the discovery capabilities of mobile devices, particularly invisible search.

We dismissed our infringement claim against mobile music discovery leader Shazam to provide them more time to see if a negotiated resolution can be attained. AlpVision was announced as our business partners early in the quarter. So we continue to invest in our current ventures with Nielsen.

Our patents base grew by over 20 issued patents, bringing the total portfolio count to over 600 at quarter-end. We also filed more than 30 more applications during the quarter, maintaining a pipeline of pending applications of more than 420.

Opportunities to scale the revenue growth are within reach. We are exploring means to facilitate our skilled licensing over IP and in some ways early adoption of our technology in various product markets. Well, the timing and probability to close are not easy to predict. We believe that the financial impact from these opportunities could be significant. We would dedicate significant resources to those initiatives.

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