DMRC

Digimarc Corporation (DMRC)

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Digimarc (DMRC)

Q3 2012 Earnings Call

October 25, 2012 5:00 pm ET

Executives

Bruce Davis - Chairman, Chief Executive Officer and President

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

Analysts

Walter Schenker

Paul D. Sonz - Paul D. Sonz Partners

Keith Maher - Singular Research

Kevin Hanrahan

Presentation

Operator

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

Good afternoon. Thank you for participating in today's conference call. Welcome -- Michael McConnell, our CFO, is with me. On our call today, we will review and discuss Q3 2012 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 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.

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

Michael McConnell

Thanks, Bruce, and good afternoon, everyone. Revenues for the quarter was $8.9 million for 2012, an increase of 4% from $8.6 million in the third quarter of 2011. Our licensing revenues increased 16%, primarily due to increased revenues from Intellectual Ventures and Verance. Our service revenues were down 16%, mostly due to the suspension of joint ventures with Nielsen in the first quarter.

Our gross margin increased 84% in the current quarter from a year ago and -- primarily due to a higher proportion of licensing revenues versus service revenue. Our operating income increased 11% to $1.6 million or 18% of revenues in the third quarter from $1.4 million or 17% of revenues in the same quarter a year ago. And the increase is primarily due to the higher gross margin.

Our pre-tax income more than doubled to $1.6 million, due largely to the elimination of approximately $700,000 of Nielsen joint venture losses recorded in the year ago quarter that were not incurred this quarter due to the previously announced suspension of the joint venture operations with Nielsen.

Our income taxes were 39% of pre-tax income for the quarter compared to 17% in the prior year, with the 2012 results reflecting a more normalized tax rate after benefiting from utilization of NOLs and deferred tax assets in 2011.

Our net income increased by 57% to $1 million this quarter compared to $600,000 in the third quarter of last year. Our balance sheet remains in excellent shape with about $43 million of cash and markets securities and no long-term debt.

Our operating cash flow was $1.3 million or 15% of revenues, and we purchased about 73,000 shares of common stock during the quarter at an average price of $23.44.

Our financial performance, thus far, in 2012 is within the range of our expectations at the start of the year. Note that the current year's licensing revenues reflect the $8 million past due royalty payment from Verance received in Q1 of this year, and the current year service revenues reflect approximately $1.8 million lower revenues from the Nielsen joint ventures.

Excluding the impact of the Nielsen joint ventures and the Verance items from our revenues, we see a 6% revenue growth year-to-date in 2012 versus 2011, and the primary contributors to this growth was the licensing from Intellectual Ventures and in our government services area.

And finally, I'm pleased to note that Digimarc's Board of Directors has declared a cash dividend of $0.11 per share of the company's common stock. The dividend is payable on November 20 to shareholders of record as of the close of business on November 6, 2012.

For a further discussion of our financial results and risks and prospects of our business, please refer to our Form 10-Q for the third quarter that we expect to file very soon.

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

Bruce Davis

Thanks, Mike. The level of activity on all front escalated in Q3. I'll touch on some of the highlights that are right for public disclosure.

First, I'm pleased to announced that we've agreed on a budget for 2013 with our Central Bank customers and anticipate approximately 14% revenue growth with higher gross margins.

Next, concerning Intellectual Ventures. And as you know, our agreement with IV provides a 20% profit participation after contractually authorized costs are deducted from revenues attributable to our portfolio. As previously discussed, we have received 2 participation reports from IV: one for the fourth quarter of 2010 and another for the calendar year 2011. The next report is due March 2013. The first 2 reports indicated that there was no profit for those periods.

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