Digimarc Corporation
Q1 2021 Earnings Call Transcript

Published: 29 Apr 2021

[Operator:]

Good afternoon and thank you for participating in today’s conference call. Now I would like to turn the call over to Chief Legal Officer, Mr. Bob Chamness. Sir, you may proceed.

[Bob Chamness:]

Thank you. Welcome to our Q1 conference call. Riley McCormack, our CEO and Charles Beck, our CFO are with me. On the call today, we will provide a review of Q1 financial results and an update on the business, followed by a question and answer forum. We have posted our prepared remarks in the investor relations section of our website and will archive this webcast there. Before we begin, let me remind everyone that today's discussion contains forward-looking statements that have risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.

[Charles Beck:]

Thank you Bob and good afternoon everyone. Before I dive into the financial results I want to make everyone aware of two important changes we have made to our financial reporting structure. First, we are merging what we previously referred to as Retail and as Media into one market category called Commercial. This change was made to better align with the structure of our sales organization to create better alignment and greater accountability. Second, we will report both total bookings and first year bookings for the Commercial market to provide better insight into future revenue trends. The definition of total bookings remains unchanged and is defined as the noncancelable value of a contract over its term versus first year bookings which only includes the non-cancelable value over the first 12-months of the contract. To provide full transparency, in our earnings scripts we will provide comparative information under both the prior and new reporting structure for the remainder of 2021. We have also included a table within the script showing these comparative results for all of 2020. Revenue for the first quarter was $6.7 million or 8% higher than Q1 last year. So this revenue increased 1% from $3.7 million to $3.8 million reflecting growth in Services to Commercial customers partially offset by a decrease in services to the Central Banks due to timing of program work. Subscription revenue increased 19% from $2.5 million to $2.9 million reflecting the impact of signing a new Commercial customer, which resulted in $460,000 of revenue during the quarter. The majority of the minimum contract value for this deal was recognized as revenue upfront, versus ratably over the term of the contract which is customary for most of our Commercial contracts. Revenue was recognized upfront as there were no continuing performance obligations once the software was delivered. I anticipate we will see similar deals like this in the future but I still expect most deals to result in ratable revenue recognition over the term of the contract. Revenue from Government was lower by 2% from $4.0 million to $3.9 million reflecting the timing of program work with the Central Banks. For the full year, we still expect revenue from the Central Banks to grow modestly in 2021 over 2020. Revenue from Commercial was up 26% from $2.2 million to $2.8 million reflecting the impact of the contract I just referenced earlier and the impact of higher services to Commercial customers in support of the plastics recycling work in Europe.

[Riley McCormack:]

Thanks Charles. I want to start off by talking a bit more about the change in how we are presenting our financial results. This change reflects both how we are now going to market and how we are now running the business. In reimagining our Go To Market strategy, we realized the prior split of our commercial business into “Media” and “Retail” was not only flawed in name but also flawed in focus and opportunity maximization. There are wonderful assets, including and especially human assets, in the area we used to describe as “Media” that we could be, should be, and now are applying to our broader commercial effort. Therefore, the historic split no longer captured who we are or where we are going, and it was a no-brainer silo to knock down. Kindly note, we will continue to provide detailed breakouts for the rest of this fiscal year, so you will be able to monitor our business using both old and new reporting structures, on both a bookings and a revenue basis. Today’s transcript provides all this information not just for Q1 2021, but also for each quarter of FY 2020. In addition, we are now also providing further transparency into the segmented duration of our bookings numbers because it is important for your understanding of our progress. As with everything, we are fully open for feedback, thoughts or suggestions on how we can shed further light. I also want to provide you an answer to Jim Ricchiuti’s question from the Q4 call, an answer that I would imagine many are curious to hear. We currently still expect to report triple-digit bookings growth in what we used to refer to as our Retail business, although we now believe revenue growth in this area is unlikely to clear that bar. Revenue will, however, grow at an extremely high rate. I believe bookings is the best indicator for what all of us are waiting impatiently to see

[Operator:]

Thank you. And your first question is from an investor named Harvey Montaz

[Riley McCormack:]

Hi, Harvey.

[Unidentified Analyst:]

Could you go into a little bit of detail on the number of shares? We had 12 million this time last year and we're up to 16 million now. And then also if you could address the number of short through like 15% of our outstanding stock has been sold short.

[Riley McCormack:]

Yes. Let me address the share count, that myself. We bought 3.7 million shares. So, that the share count traverse into -- any other comment on that?

[Charles Beck:]

Yes, 16.9 million shares outstanding.

[Riley McCormack:]

Yes. So, your numbers are a little bit off but 3.7 of that was me and my won royalties. On the shirts, you want me to confirm the number that you said or what's your question, why are they there?

[Unidentified Analyst:]

Yes. Why it's 15% -- why does so many people want to be shorting us when we're such a wonderful opportunity out here?

[Riley McCormack:]

I don’t know. Again, I mean it's a great question. I honestly don’t spend that much time on the shirts and I'll answer then -- if Charles or Bob you want to join in. but the best way shirts perform -- there's nothing wrong with shirt, they're just doing their job. Our job is to show them at least in this case, they're not very good about. So, the best way to beat the shirts is one contract at a time, two contracts at a time. And the best way to get rid of them is to execute. So, we do care about the stock obviously for many reasons. One is to put attention to for the team and recruiting and maintaining a fantastic team is one of my number one priorities in all of our top priorities, is the currency for acquisitions that's ever when we consider going forward. And importantly too, I get it is a price where owners have to transact by monetize. This is your entry and exit price that Digimarc has placed at the stock. It candidly I kind of always hope we have a high shirt interest because it's a great shock absorber. And shirts are just people that at some point have to buy your stock. I mean, there is lot of people on this call or out there in the world who don’t ever have to make a decision to buy Digimarc stock. Shirts eventually have to buy our stock if we prove them on. So, that's my thought on the shirt. There's probably more than I thought about it in the last three months.

[Unidentified Analyst:]

Okay. Will we be moving to Portland or you're just going to still operate out of Florida?

[Riley McCormack:]

That's a great question. I actually just signed my lease today, I'm not going to move full-time. I got a 10-year-old and an 11-year-old in own school here but I will be logging a lot of miles in here. And also, I don’t just want to come to Oregon, I mean it's very important to spend time with the team. But there's a lot of our business that's happening elsewhere in the world. And there is nothing that would make me more happy than to get on a plane and go visit customers and suppliers and partners. It's a little difficult to tell, people don’t really want to do face-to-face meetings. So, I was doing a lot of those meetings on teams in Zoom. But yes, I'm going to probably get platinum status pretty quickly here on the plane.

[Unidentified Analyst:]

Okay. Will you be getting a national PR company?

[Riley McCormack:]

I'm sorry?

[Unidentified Analyst:]

Will you be getting a national public relation company?

[Riley McCormack:]

So, from all sorts of communication, investor relations, corporate communication, government relation are a big focus of ours and that's what we're working on.

[Unidentified Analyst:]

Okay. Thank you, very much. Look forward to many more years.

[Riley McCormack:]

Fantastic, me too. Thanks.

[Operator:]

And your next question is from Andre Peppitue with Coatue Capital

[Riley McCormack:]

Hi, Andre.

[Unidentified Analyst:]

The G-10 or the pricing as you would prove on a per G-10 basis. So, in light of your confidence that that will be north of 50 when you calculate that. And my understanding is there its 10s if not 100s or millions of G-10s out there. Is it fair to say that you're looking at going on -- I don’t want to pin you down on an exact number but something in the billion on HolyGrail 2.0.

[Riley McCormack:]

So, we haven’t talked about our pricing for recycling application, right. But my bigger point was in almost every case that I'm aware of which is a lot of cases. We can move if in version 1.0 it made sense because we were trying to replace the G-10 for cornerstone. That was sort of it was a natural matric with which to anchor pricing. As we evolved the 2.0 and 3.0, we were solving problem and not telling G-10, we can do it a value-based pricing. And so, obviously we're not going to proactively pre-release what our pricing schedule is. There is every pricing contract needs a negotiation, right? But I stand by with what I say is I can't think of very many application anywhere where the pricing when viewed from a different matric and an arbitrary number for G-10. Again, I'd try not to talk about sustainability but think about some of the products out there and how many billions of units are sold or it's been a plastic, right. I think riding more than $50 if we can recycle some of those. So, if not -- yes, at some point we probably do a post-mortem and back in and say well what does this mean on a per G-10 basis. And that's now where our head is. With our head -- where head is right now is what is the problem. Try to quantify that as best as we can working with customers in some cases. What is the problem, what is our solve and what percentage of that do we take. The G-10's almost it's just not relevant.

[Unidentified Analyst:]

Okay, great.

[Riley McCormack:]

What I would say Andre maybe another would answer you first without answering how we're going to price per cycling. Yes, the massive mass of opportunity.

[Unidentified Analyst:]

Okay, thanks. I'll wait for the Analyst Day on more specifics, I guess. Thanks.

[Riley McCormack:]

Thanks, Andre.

[Operator:]

Your next question is from Jeff Van Rhee with Craig-Hallum.

[Unidentified Analyst:]

Hey guys, this is Rudy on for Jeff. I want to start with the one customer that contributes the 450,000 in the quarter. And I think you just said it was a commercial customer unless in there something with it. Was that a media or retail customer, what was the use case, just any more color that you give on that one?

[Riley McCormack:]

Yes, Rudy. That was what we would have previously classified as a retail customer. And so, their focus is around brand protection and traceability.

[Unidentified Analyst:]

Got it. And so there's no -- there is no significant ongoing recurring stream from them, this was a one-time license deal?

[Charles Beck:]

So, that's the minimum value of the contract. So, they made a certain level of commitment. There is potential upside where we get recognized as an upside is realized.

[Riley McCormack:]

Yes. And Rudy, this is an ongoing -- this is a we didn’t do like a one-time deal, if that's your question. This isnt some license payment, this is a revenue recognition issue or not issue with them. As Charles said this would be normally recognized over time and because of this just so good specifics of this contract but this is an ongoing relation we hope continues three years and grow as just Charles said.

[Unidentified Analyst:]

Yes.

[Charles Beck:]

It's basically a minimum price for two years. So, beyond two years there is opportunity but even within the first two years there is opportunity for upside.

[Unidentified Analyst:]

Got it. The Golden Thread you talked about Hamburg. What more specific gab in there you could share at this point. I know you said or you're talking backwards or forward may but with Hamburg just what are the initiatives from here with them over the next 12 months in terms of testing. Have they laid out any specific timelines yet or?

[Riley McCormack:]

Bob, you want to take and answer that?

[Bob Chamness:]

Yes. It's still in the early planning stage. The environmental climate energy in agricultural authority of the city of Hamburg is that working with both partners of which we are one and to put a plan together. And there will be participation by a Hamburg technical university in developing the project study. So, let's look at it as early stage planning for deployment later in the year. And the primary focus is on proving up the ability to both identify and sort the various forms of plastic polymers and to increase the quantity of recycle waste. We then pull out of the waste stream and to improve the quality of the sorts. So, that's kind of the nature of the project.

[Riley McCormack:]

Yes. And really significance here is multiple groups forming to prove our technology is the top of the trade. There is no single group, there is multiple groups that are being formed and running tests and trials that are running simultaneously to get to the same answer. So, this is they've alluded to there is other Golden Threads that we not yet talked about. But there is more than just one test of our technology as to the answer for plastic recycling.

[Unidentified Analyst:]

Got it. And then, just one more. I know you talked about sort of revamping the whole product market engine and then have that ready in next year and beyond. Just what are your early thoughts on what that looks like, I mean what does it look like now and what do you guys want to change and transform it into?

[Riley McCormack:]

Sure, I'm glad you asked that question because I must have misspoke, that's already happening. My only point was we are changing how we go to market as we speak and actually happen. But because of this axillary engine we have, you're not going to notice it the booking when we get and recoup, and again I don’t want to help it too much because as I said to me it's not the exciting part of this call. We're reaffirming that we believe that we will do triple digit bookings for this year. But at the same point, we're completely judging how we go-to market and that's what I'm when I saw this -- this is where it gets so exciting about this opportunity. So, how exactly where we're changing the go-to market. We -- I talked about we're being driven by data or customer obsessed. We have focussed our resources on opportunities that are part of the roadmap of planning. So, as opposed to which is a very version 1.0 of any company where you're kind of feeling out what the market is. We're at the point now where we have the opportunity in and I won't say it's a luxury but call it the benefit of planning and being thoughtful in how we build our products and build those products into solutions and what business we're taking on that further and partnerships we're taking on that further that goal. So, it's a little bit more when you ask what it looks like, I can't get specific details, what I'd love to do on the next call is bringing Tim and Kelly on the call so you guys can talk with. You're thinking about that they're doing the organizations and again it's not just sales and product. I mean obviously any organization to work well, the wheels the cog wheels have to all work together. So, every organization, very functional group of Digimarc is going through this amazing telecom upgrades. But they are empowered to change become the organization that we know we are. And so, that what's most probably on the go-to market -- is kind of the tip of the sphere is on product and sales. And I guess specific questions again Tim and Kelly will be on the next call. But it's everything I talked about. It's being customer obsessed, becoming easy-to-do business with. Not chasing deals just because they bring some bookings into 2021, its planning, its data driven decision.

[Unidentified Analyst:]

Got it. And then just lastly I have a good -- speak last one in here. Any updates on Wal-Mart either in count or number of packages that they've tagged or just any expectations and when they roll out their more labor?

[Riley McCormack:]

I don’t know the labor eschews, I don’t know if we talked about that. Charles?

[Charles Beck:]

Yes, we normally do and that's their bid on us.

[Unidentified Analyst:]

Okay, yes.

[Charles Beck:]

I think when we've highlighted before Rudy is that they're continuing to enhance packaging. There hasn’t been any disruption in the work that we're doing there but we're not going to give regular eschew count updates.

[Riley McCormack:]

Yes. And I'll talk about the second part, which is part of the beauty of this business model is also part of the risk which is there is always going to be some go-to market partners. Even if we build out our solution stack, there's always going to be adjacent tech or adjacent products that we touch. And so, you've heard the history here that this is initiated outside of our tech set. Now, we could give up and we can say challenge accepted in turn what could have been a defeat into a victory and you're paying attention. I think the caliber and toughness of this team, so you make your own conclusion on which route they chose. So, setbacks become opportunity. So, there's three things working with us with Wal-Mart. They are an awesome corporate citizen in every day doing the best things for their stakeholders not just the shoulder of all of their stakeholders. There is a lot of areas we can provide to their quiver. And we head down focus all of our customers. So, we actually brought in a consultant two months ago, this one he started his work to really help us take to make sure we're maximizing all of this opportunity with this wonderful customer of ours. I mean, there we sell a line. Wal-Mart is so focused on doing the right thing as a corporate citizen and there is so many tools that we have they could help them. And what's wonderful about this work and this reinvigoration of what we can provide to Wal-Mart is the output of this study and it could -- these goes back to the go-to market. This is the planning, it's supposed to be kind of weaving our way through it. We'll take a step back, let's look at what Wal-Mart wants, let's look at what we have and lets really study this with Wal-Mart. And so, I think the output of this in space but I think the output is to be a great win for us with Wal-Mart because we're going to get closer to our customer. The goal again we want to not just be a supplier, we want to be a partner. Secondly, what we've learnt during this process is that's the planning. Now, what we've learnt we can take this process and apply it to other retailers. And then the last thing is this is the process, it is wash rinse and repeat. Once we've done this deep dive and how do we really understand and work with the customer to understand where we could be going with the solution provider. That's a template we're going to have internally not forever and we can use it for other people as well besides these retailers.

[Unidentified Analyst:]

Got it, great. That's it from me. Thanks for that.

[Riley McCormack:]

Thanks, Rudy.

[Operator:]

Your next question is from Robin Knipp with Janney Montgomery.

[Robin Knipp:]

Thanks very much, operator. So, Riley you partially answered the question that I was going to ask about understanding the sales culture at Digimarc and how effective it's been where we come from where we are and where we're going. And what I heard you say was if we can wait till the next quarterly call and get Tim Price on the call that would be helpful just to have a better understanding. So, let me just skip to my second question if I may. And that is, I recently attended the World Commercial Property Day 2021 sponsored by the U.S. Patent and Trademark Office during which I was able to hear Joel Meyer who is the EVP of Innovation Specifications and Standards.

[Riley McCormack:]

I know Joel. I've heard of Joel here.

[Robin Knipp:]

Yes, I thought you had. Speak about the value proposition that digital Wal-Mart’s can bring. So, during this time or state moves made by another one of the panelists I think it was Frank Captain who said "Intellectual property is probably the most valuable asset in anyone's portfolio." So, given our very robust and unique patent portfolio and the unique technology that we bring to solutions, can you help us understand how we should be thinking about how to value our intellectual property?

[Riley McCormack:]

Yes, what I get to say now, Robin? That's your job not mine. Unless we're looking to monetize it, it's not my job. And Bob would probably cut me off by trying to do that anyway. There are so many levels of goodness here. And our IP is the massive one but it's only one. So, IP is I guess maybe the bedrock of which all value can be build. You can't build a lot of value in technology without strong IP, you can't. You can also build nothing and have a lot of value in IP. What we're doing here is both. What that turns into, what multiplier fact that is and on even if I could take a gadget the value of the IP I'm not going through but then with everything we're building around it. There is a slide deck on the on our homepage. It's an introduction to whatever. And I forget what slide number it is but there is where we list the notes or I forget how we wrap into it. But to me it's sort of like why there is so much so many layers that of value and actually it's I think it's concentric circles is the way we represent it. IP is one part of it. There's massive value on each one. So, I would challenge you and say Robin don’t you stop at picking up the value of IP to get the value of every other mode in that stack.

[Robin Knipp:]

That's fair enough. I just -- the reason behind the question is really as much function of what's it worth but also the IP portfolio, we've got patents that run off at a certain point-in-time. With over 1150 patents issued and pending, I have no clue what the patent run off if some say it looks like.

[Riley McCormack:]

Yes. But that's only one of remotes, right?

[Robin Knipp:]

Right.

[Riley McCormack:]

So, that's my point is you can have a lot of value in technology with our IP. And using patents as in particularly there's an I don’t know if you -- right.

[Robin Knipp:]

Correct, yes.

[Riley McCormack:]

And so, here's the thing, there are a couple of ways to answer that one. Number one is if we're not constantly patenting new things, we're not doing our job and Joel is not doing his job. And I know Joel does his job very well. So, one is request patents run off, and it's our only mode. If our only single mode was patent, yes, in 20-years maybe somebody could be where we are today with our tech stack.

[Robin Knipp:]

Right.

[Riley McCormack:]

And our job is to stay in front of that and then constantly be innovating. But the IP protection that's had in both protection is only one layer of that protection. So, something we're obviously very focused on, something for Joel especially is very focused on but it's just --. I'll say if you go to that, if you go to the website and look at that deck, it's just one part of this concentric circle and this stack of modes that we have.

[Robin Knipp:]

That's fair, I'll go spend some time there. Thanks for taking the question, Riley.

[Riley McCormack:]

Of course, thanks Robin.

[Robin Knipp:]

Yes.

[Operator:]

Your next question comes from investor Matthew, Ten

[Unidentified Analyst:]

I have a specific question and then some more general question. Specifically I'd like to focus on the practical method customer. And I'm wondering is my understanding correct that on the income statement, the revenues there which show up on the in the new Subscription category and not the Service category.

[Riley McCormack:]

That is correct.

[Unidentified Analyst:]

And then have revenues appeared on the March statement or do you expect it to show up in future statements?

[Riley McCormack:]

So the most of it was recognized in Q1. So that's the well I should say on that particular contract yes we won't get into it on those specific contracts on individual customers.

[Unidentified Analyst:]

Okay fair enough. Right so and then it's exciting because you said there's a minimum commitment of eight figures. So is my understanding correct that eight figures refers to tens of millions?

[Riley McCormack:]

Serialized codes. So we're not going to pricing with any. So serialized codes meaning .

[Unidentified Analyst:]

Right. tens of millions of codes. Correct.

[Riley McCormack:]

Yes correct. Serialized code so you understand so again that's different than the $50 per GTM so this is –

[Unidentified Analyst:]

Right. understood. This is first –

[Riley McCormack:]

Which was kind of my point let me just take a quick so not talking I'm talking completely generically so nothing about practical methods. In general if we have a contract for serialized and you do what I mean by serialized codes.

[Unidentified Analyst:]

Right. I mean just like you said for the HP link where you can have an individual code for an individual package to enable tracking.

[Riley McCormack:]

Right. So take product xyz and let's say so product xyz under the old rubric of thinking about it might be $50 for xyz’s GTM but if they sell a million items we get and it's they're serialized it's per item that's a serialized code. So back to my point in question about how to think about different pricing metrics. I have no idea to be honest on the practical method that the eight figure of codes how many GTM that might represent how many different products those are going on but I would assume I don't know this and it's not really my place to share but I did know it that if you did the math on that random metric of GTM it would be higher than $50. So serialized code just means an individual item gets its own code.

[Unidentified Analyst:]

Right. understood and they want to track tens of millions of items right so that --

[Riley McCormack:]

At least remember Charles said that's the minimum and practical methods and Howard are absolutely fantastic as a company and fantastic team. So I would like over time that to go up because they're a great company and we're happy to have as a partner. So their success is our success.

[Unidentified Analyst:]

Right and that also shows the power and the correctness of your switch to value-based pricing because obviously no one would pay more than they think it's worth and the real difficulty is convincing the customer that getting to agreement with customer on the value of the solution and that's where it takes off and that gets to my second question which is do you believe in the hockey stick model of earnings and if that is what's in your mind where do you think we are on the hockey stick at the moment?

[Riley McCormack:]

It’s great question, it’s the great attempt. I don't know, I mean I literally I wasn't just throwing random words at the beginning of this call where I said there's a lot of reasons why it's really tough to forecast this business. There is size and scale issues that any company our size would face but then we have these other really big complicators or things that make it even more difficult. First of all we have very large lumpy opportunities. I don't know how to expect. Those are very tough opportunities for the expected value on but the other thing is there's other, there's multiple ways to come to market with it. So somebody can say hey listen, here's what we think we're going to use over X- period of time or whatever and so I want to sign an enterprise license today and liquidate some of that value. So I'm willing to pay you up front and obviously as you would imagine somebody pays upfront they're probably going to get some discount and the other way is to say yep we're fully in but we're going to pay as you go. We're going to pay as you roll out and then that obviously has a wonderful impact at full scale that contracts bigger than if they paid an upfront license or not in front of upfront booking an enterprise deal but it takes longer to hit. So it's not just a matter of trying to nail the timing it would also be trying to understand where exactly and how these different contracts are going to come in plus again I think if I tried to answer that Nob it'd probably disconnect my line so I'm not going to try.

[Unidentified Analyst:]

Okay. Well good enough, I mean obviously I feel very optimistic about what I'm hearing on this call.

[Riley McCormack:]

So it makes two of us. Hopefully at least more than two of us but thank you for that. Yes I agree.

[Unidentified Analyst:]

Yes. That's it. Thank you.

[Riley McCormack:]

Thank you.

[Operator:]

At this time this concludes our question and answer session. I would now like to turn the call back over to Mr. McCormack. Sir please proceed.

[Riley McCormack:]

Well, I'm glad there were more questions this time than last time. Thanks everybody for dialing in and ironically I'm just looking at the clock and I was ended up being an hour anyway but I really do appreciate you guys dialing in and we look forward to updating you guys in the future. Take care. Have a good night.

[Operator:]

This concludes today's call. Thank you ladies and gentlemen for joining us for our presentation. You may now disconnect.