DMRC

Digimarc Corporation (DMRC)

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Digimarc (DMRC)

Q2 2011 Earnings Call

July 21, 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

Adam Fisher - Burnham

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. Mr. Davis, please proceed.

Bruce Davis

Thank you. Good afternoon, everyone. Welcome to our conference call. Mike McConnell, our CFO, is with me. The objectives of this call are to review and discuss second quarter financial results, talk about significant business developments and market conditions and provide an update on our strategy and operations. The webcast will be archived in the Investor Relations section of our website.

Please note that during the course of 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. 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 of strategy. Mike?

Michael McConnell

Thanks, Bruce, and good afternoon, everyone. Our quarterly profits grew by $4.5 million over last year on significantly higher revenues. Our balance sheet remains in excellent shape, with more than $30 million of cash and securities and no debt.

We purchased -- repurchased approximately 66,000 shares during the quarter, and we continue investing significantly in growth, including marketing of our intellectual property with Intellectual Ventures, building-out our joint ventures with Nielsen, developing the second wave of retained patents and beginning commercialization of Digimarc Discover, all in support of our vision of enabling computers, networks and other digital devices to see, hear, understand and respond to their surroundings.

Q2 financial highlights included revenues of $9.5 million, 81% higher than the prior year, reflecting increases in our new relationship with Intellectual Ventures and strong growth in some of our long-term licensees.

Our gross margins of 82%, which were 11 points higher than the prior year, reflect a greater mix of license revenues to the total while gross margins on service revenues were consistent with the prior year.

Higher operating expenses reflect the increased investments in our new product initiatives and some ongoing litigation costs, an operating profit of $2.3 million or 25% of revenues. $700,000 capital contribution to our joint ventures with Nielsen, where our share of the net loss for the quarter was about $700,000. And $1.9 million net income tax benefit, primarily related to recovery of net deferred tax assets that were previously fully reserved. We'd expect our effective tax rate for the balance of the year to be in the neighborhood of 30%, subject to changes and are currently estimated at tax credits.

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

Bruce Davis

Thanks, Mike. As I'd noted on our last call, we got off to a nice start to the year. Our overall operating performance continues in line with our expectations. Market conditions are robust. Signs continue to indicate to us that the dawn of the era of pervasive intuitive computing is upon us. As sensors proliferate and networks gain intelligence, [indiscernible] identification of what's being processed becomes less necessary. In this world, simple, reliable identification of media objects is increasingly commonplace. From security for digital images, band notes and movies to music discovery and synchronized television, the common theme is an increasing capability of digital devices to recognize what they are processing. To see and hear, largely as humans do.

This growing capability will change the world, simplifying access to the benefits of computing throughout everyday lives for everyone. We think that Digimarc has an important role to play in this new world order.

Given we are at the midpoint of what is proving to be a very busy and complex year of development for us, I will spend more time than usual today commenting on our execution strategy and market conditions across the range of our business and our plans to grow profits from these markets.

Back to our level, these are remarkable times. Much of what we do is related to a concept referred to by many as the Internet of Things. At a recent industry conference, the VP of the European Commission for Digital Incentive for the EU commented that the Internet of Things is expected to connect 50 billion devices by 2020. That's about 6 for each man, woman and child on the planet. The shift from an Internet of People to an Internet of Things will create unprecedented market opportunities. We are seeking to play an important role in this new era. Now let's begin more specifically how things are going in execution strategy for doing so.

First, in the Government area. I'm pleased to note that we have an approved plan on budget for 2012 with our Central Bank customers. The budget was recently consistent with the growth trends of the last few years. In other government work, revenues blurred [ph] our expectations during the first half of the year. However, some recent contract awards in cyber security defense lead us to believe that this servicing [ph] will begin to improve in the second half of the year.

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