DMRC

Digimarc Corporation (DMRC)

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Digimarc (DMRC)

Q4 2010 Earnings Call

February 28, 2011 5:00 pm ET

Executives

Bruce Davis - Chairman and Chief Executive Officer

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

Analysts

Corey Barrett

Paul Sonz - Sonz Partners

Nick Zamparelli

Kevin Hanrahan - KMH Capital Advisors

Presentation

Operator

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

Bruce Davis

Good afternoon, and welcome to our conference call. Mike McConnel, our CFO, is with me. The objectives of this call are to review and discuss 2010 financial 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 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 offer about future performance represent a point in time estimate and 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-Q.

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

Michael McConnell

Thanks, Bruce, and good afternoon, everyone. With extraordinary success in our licensing activities in 2010, we saw revenues grow 63% to $31.2 million, resulted in $4 million net income. The revenue increase was driven primarily by our licenses with Arbitron in the first quarter, and with Intellectual Ventures in the last quarter. We generated significant positive operating cash flow, ending the year with a strong balance sheet with more than $45 million in cash and related investments and no debt.

During the year, we continue to make significant investments in growth initiatives, including the marketing of our intellectual property, our joint ventures with Nielsen, development of additional intellectual property and Digimarc Discover, all centered on our vision of enhancing computers, networks and other digital devices to see, hear, understand and respond to their surroundings.

Our Q4 2010 financial highlights included a record revenues of $10.5 million or 89% higher than the prior year, with the majority of the increase due to our new license arrangement with IV, where we received two of twelve expected quarterly payments aggregating $5.3 million for the $36 million minimum license fee.

Gross margins at 82%, reflecting the impact of higher licensing revenues as a percent of the total revenues. Higher operating expenses that reflected increased investments in new product initiatives and IP marketing initiatives, as well as litigation and transaction-related expenses. And operating profit of $3.1 million or 30% of revenues, and a $700,000 capital contribution to our joint ventures with Nielsen, where our share of the net loss was $600,000.

Our observations and current planning assumptions regarding potential 2011 financial performance include the following: Double-digit revenue growth for the year, with nearly $30 million coming from our beginning backlog; a license-to-services revenues ratio of approximately 60% to 40%, resulting in gross margins above 70%; revenues and operating income should be more consistent on a quarter-to-quarter basis in 2010, with the first quarter being the smallest of the four; continued investment and growth initiatives, particularly in the areas of directed research and IP development; and product development and marketing, associated with both Digimarc Discover and our joint ventures with Nielsen.

Operating cash flow, that's greater than GAAP earnings due primarily to approximately $5 million of non-cash charges associated with stock compensation and depreciation.

As a reminder, these highlights of financial assumptions and operating plans represent our current view of expected values based on our assessment of the most likely unfolded events over the course of 2011.

As is our general practice, we intend to update you each quarter regarding strategy execution, but do not plan to provide detailed financial guidance. For further discussion of Q4 2010 results, our business and financial models and risk and prospects of our business, please see the Form 10-K that we expect to file a bit later this week.

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

Bruce Davis

Thanks, Mike. We had a terrific year in 2010. Our accomplishments and investments during the year significantly increased our base line financial performance and laid a foundation for the next level of growth for our strategy. We believe in our opportunities for growth in all areas of our business.

Key areas of focus in 2011 include fostering success of our new licensing partner, Intellectual Ventures, developing the market for Digimarc Discover and working with another important partner, the Nielsen Company, to continue the development and foster adoption of Media-Sync for social interactive's television.

Maximizing the success of our new relationship with IV is an obvious top priority. Things are going well so far. We entered into the relationship with IV to facilitate large-scale licensing and accelerate broadscale adoption of our proprietary technologies in various product markets.

Read the rest of this transcript for free on seekingalpha.com