Digimarc Corporation (DMRC)

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Digimarc (DMRC)

Q1 2011 Earnings Call

April 25, 2011 5:00 pm ET


Bruce Davis - Chairman and Chief Executive Officer

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


Corey Barrett

Paul Sonz - Sonz Partners

Andrew Weiner - Burnham Asset Management

Bill Gibson - Nollenberger Capital

Kevin Hanrahan - KMH Capital Advisors



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

Bruce Davis

Thanks. Good afternoon, everyone, and welcome to our conference call. Mike McConnell, our CFO, is with me. The objectives of this call are to review and discuss first quarter 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 course of this call, we will make 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. 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 information about risk factors that may cause actual results to differ from expectations, please see the company's financial filings -- 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 outlook and execution strategy. Mike?

Michael McConnell

Thanks, Bruce, and good afternoon, everyone. This was our second consecutive profitable quarter and third out of the past 5 quarters. We also had positive operating cash flow in 4 out of the last 5 quarters. We continue to believe that we will grow our revenues, profitability and cash flow during the balance of 2011 and maintain a very strong balance sheet, currently with more than $30 million in cash and no debt.

Continuing with the execution of our strategic operating plan, we made 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 enabling computers, networks and other digital devices to see, hear, understand and respond to their surroundings.

Our Q1 2011 financial highlights include revenues of $9.1 million that were 11% lower than prior year, a period which reflected a one-time payment of $4.5 million for an IP license from Arbitron to buy $600,000 of nonlinear service revenues from some of our governmental relationships. In the current quarter, revenues from existing and new customers grew by more than $4 million, including $3 million from our new relationship with Intellectual Ventures.

Gross margins of 82% were consistent with prior year results as our mix of license and service revenues remained relatively constant. Higher operating expenses reflect increased investments in new product initiatives and the unusual litigation costs; an operating profit of $1.4 million or 15% of revenues; a $700,000 capital contribution to our joint ventures with Nielsen, where our share of the net loss was $500,000; and $15.7 million of stock repurchases, the vast majority being related to the acquisition of more than 550,000 shares from 1 of our early strategic investors.

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

Bruce Davis

Thanks, Mark. As I noted in the press release, we got off to a nice start for the year. Our operating performance was in line with our expectations, and we were pleased to be able to negotiate the purchase of a substantial number of shares from Philips in January.

The other big news in the quarter was commencement of a beta program for Digimarc Discover, a platform we're building to deliver on our vision to seeing/hearing mobile device as a cornerstone of pervasive intuitive computing.

Since the introduction of the beta program at Mobile World Congress in mid-February, many interesting opportunities have emerged from nearly 800 trial user accounts and direct involvement with numerous newspapers, magazines, brands and service providers around the world. Several smaller magazines have started using the platform in public trials. The beta program is scheduled to run until the end of May. It is intended to help us to refine our offering, study demand and prepare for active marketing in the second half of the year.

Meanwhile, we are beginning outbound marketing in newspaper and magazine industries. Marketing will ramp up throughout Q2 as we prepare for commercial launch. Early adoption by magazines and newspapers will have ancillary marketing benefits, educating in increasing awareness among consumers and advertisers and attracting attention from brands and their agencies.

As we are beginning commercialization of Digimarc Discover, we continue extensive research and development of subsequent phases, including basic performance enhancement, broadening and intervening various means of object recognition and innovating in higher order task for sensor fusion and inference.

During Q2, we plan to introduce music recognition in 1D barcode and QR code reading, progressing toward the creation of the universal reader that uses various technologies to identify the content consumers want to experience further. As you know, our ultimate goal is to enable mobile devices generally to see, hear, understand and respond with optimized network services when instructed by users to look or listen.

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