Q4 2019 Earnings Call

Good afternoon, and thank you for participating in today's conference call I'd now like to turn the call ever to chairman and CEO Digimarc Mr. Barry stay that Sir. Please proceed.

Thank you good afternoon everything.

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On the call today will review Q4 in fiscal 2019 financial results discuss significant business developments are mostly conditions.

Right and update on progress in executing a strategy since the last.

But the Needham conference in the January.

Just to be his prepared remarks need investor relations section of our website.

Archives, because what goes there.

Please note that we will make certain forward looking statements in this call.

<unk> remarks, we filed with the FCC scatter website under the heading Safe Harbor statement.

Regarding revenue recognition matters results of operations investments initiatives perspective, some business partners customers prospects industry trends and growth strategies.

Yeah I also discussed from time to time information provided to us by our partners that's actually potential customers.

Providing this information as we understand it was represented to us.

No not verified indoor dates for such information.

All such statements and information are subject to many assumptions risks and certainties and changed circumstances.

Any assumption, we shared about future performance represents a point in time that's true.

Actual results may vary materially from those expressed or implied in such statements.

Expressly disclaim any obligation to revise or update statements right information that we provide during this call to reflect events or circumstances that may arise. After the date This conference call.

More information about risk factors that may affect.

Actual results or closer to actual results to differ from expectations piece to the company's filings with the FCC, including the form 10-K that we expect to file shortly.

Thanks included in our prepared remarks are provided for general information in context, only the comps on references not incorporated by reference then you should not consider but part of this presentation did not verified their votes for such information.

Charles you know coming on or financial results, then I'll discuss significant business developments market conditions.

Execution strategy sorry.

Thanks Bruce.

First off so I just want to give everybody a heads up that the earnings release was distributed through PR newswire on time, However, Yahoo Finance news feed is for whatever reason not picking up that releases.

We're working with them to make sure that the release is posted on that side. It is available to all other channels, including our own website as well as the FCC website.

[laughter] barcode revenue for the quarter increased 138% year over year to $1.4 million.

Total Q4 revenue increased 2% to 5.3 million from 5.2 million in the fourth quarter last year.

The increase in market revenue was offset by lower service revenue, reflecting the timing of program work with the central banks.

Working bookings during the fourth quarter 1.3 million down from 1.8 million in Q4 last year.

The decrease was due to sudden and unexpected corporate cost cutting and one of our supplier partners developing supply chain applications, leading the renegotiation of our contract with them.

That contract contributed 1.3 million to bookings in Q4 last year.

We expect to Q1 bookings from a revised contract that is being negotiated.

Expects that the new contract will have less fixed and more variable elements than its predecessor, yielding lower short term bookings and revenues with higher potential upside.

Once things are settled I'll provide additional details.

This does not affect any of our retail business. This developers focuses on supply chain improvements.

Gross margin for the quarter was 66% up from 60% last year, primarily reflecting the impact of higher market revenue.

Operating expenses increased by 9% from Q4 last year, primarily reflecting routine annual compensation and benefit adjustments for our employees, an increase headcount to address growing demand and delivery requirements.

Net loss for Q4 was 8.7 million were 73 cents per diluted share versus a net loss of 8 million or 70 cents per diluted share in the fourth quarter last year, reflecting higher operating expenses.

We ended the quarter at 36.8 million in cash and investments we did not raise any capital under our ATM program during the fourth quarter.

There was 9.7 million remaining of the 30 million authorized.

We'll exercise customary care in determining the best course of action regarding the remainder of the authorization to circumstances warrant resumption of sales under the program.

We invested 6 million of working capital during Q4, which was at the low end of the range of six to 7 million. We provided in our last call largely due to favorable timing of cash receipts and payments.

We use 5.6 million of cash to fund operations and 500000 for capital expenditures.

We anticipate operating expenses in the first quarter to be between 13.6 million and 13.8 million.

Roughly 10% projected increase in operating expenses over the fourth quarter reflects the impact of routine annual cost of living adjustments for employees increased headcount encoder specific costs for intra other sales and marketing initiatives and the yearend audit.

We expect a cash usage will be between 70 million in Q1, reflecting the reversal of a favorable timing of cash receipts and payments we saw in Q4.

And the impact of the quarter specific costs I just mentioned.

We expect our average cash usage for the remainder of 2020 to be at a lower run rate than we are projecting for the first quarter.

And we'll continue to vary quarter to quarter, depending on timing of cash receipts and payments.

Turning to results for the full year.

Hi, good revenue increased 105% over last year to 4.9 million.

Total revenue increased 8% to 23 million from 21.2 million posture.

The effective doubling barbecue market revenue was partially offset by Guardian revenue decreased 11% from last year to 3.2 million.

Revenue from the Central banks was up marginally over 2018 as expected.

Barcode bookings for the full year were up 60% to 4.9 million from 3.1 million last year.

The increase in bookings reflects the impact of the Walmart contract and other new barcode bookings, partially offset by the impact to the contract renegotiation, what the developer that I referenced earlier.

Gross margin for the year was up five points to 65%, primarily reflecting the impact of Herbert revenue.

Operating expenses for the year increased by 5% from last year, primarily reflecting the impact of routine annual compensation and benefit adjustments for employees.

Turning to the balance sheet cash and investments were 6.8 million lower than at the end of 2018, reflecting investments in our primary growth initiatives offset by the 19.6 million of capital we raised in the out the market offering during the second quarter.

For further discussion of our financial results and risk some prospects for our business. Please see our form 10-K that we expect to follow shortly.

Bruce will now provide his comments on significant business developments market conditions and execution strategy.

Thanks Charles.

Awareness of Digimarc and engagement have risen to much higher levels than that last few months.

Hi traffic is up across the board in Q4, social media followers increases as well.

We are working our way up the rankings of IP priorities with retailers.

He cpgs are now engaged across the range of relevant applications in manufacturing reason Gil store operations and recycling.

We begin each year with a coincidence of NRF and the Needham Conference I described our progress during 2019 and some insights gained an underwriter during needham.

Thus I think dwell on 2019 in this update.

The need and webcast is posted on our website for those who want details of our progress last year.

At a high level the year to key to many important milestones as Walmart and that'll came onboard lebanon's renewed its contract to support among people want brands expanded significantly.

Hard to adequately communicate this growth in our supplier network and our ability to support their a central role in our success.

Deserve the greater progress and adoption in revenue growth. This is where we can get the most leverage.

We have added staff in Missouri, and focused a great deal of senior management on establishing effective mutually profitably partnerships at all aspects of the developing ecosystem.

Successive these endeavors will facilitate sales growth.

Hey, rich rewards to our shareholders in the long term.

We had the best show ever in 2020 and a rough.

Demonstrations and sufficient inventory management feed waste and shrink reduction sustainable and connected packaging connected apparel and print to web connected catalogs print ads and promos there were more than 3000 beacon visitors.

34 partner and 24 customer briefings, most prominent which are listed in the prepared remarks.

We entered into a contract with Walmart in Q2 last year for fresh product labels and packaging.

First product label portion is taking longer than expected.

Labels have not yet reached the stores due to some issues and system integration beyond our control that appear nearing resolution we plan to be in the stores in Q2.

On the other him packaging work at Walmart is going great.

Weldments took several years to raise 2000 packages enhanced.

Metal pass this milestone stone in the year.

Walmart is already over 2000 after seven months.

The increases in productivity reflect maturation of our platform and support programs.

These improvements are allowing a rapidly increasing share of package enhancement to be done by suppliers. This has allowed us to be more open to progress in the broader global market. It also includes our productivity demand more time to internal experts for research and development and training.

We've conducted more than 50 trainings in the past year alone.

R&D is producing important advancements in mercury cater dry offset metal decoration plastic moulds vending machines and fabrics broaden their application support capabilities.

Walmarts packaging suppliers continue to add hundreds of items into walmarts supply chain monthly partially global brands suppliers that began arriving in stores.

It will brand progress is not limited to Walmart as Digimarc enhanced packaging is appearing on shelves across the real b cell landscape of America wood products from PNG Pepsi free delay Quaker Oats picked corporation International paper, So Guerrero, Kimberly Clark Conagra General Mills and others.

Enhancement of the Walmart Tory catalog open the door to discussions of additional commercial print opportunities.

We will continue to bring more innovations to Walmart helped improve the shopping experience for their customers and working to propagate successes at Walmart two other domestic and foreign retailers under common ownership.

As our entering demonstrations indicated there as much we can do in areas not covered by the current contract such as apparel home and garden commercial print sustainability and supply chain management directly with Walmart and with suppliers. There are many auto identification functions of store operations that can be improved through the use of our.

Got forms including scanning go shelf inspection robots to come back for curbside delivery consumer engagement reordering and recycling.

We are witnessing enormous uptake.

Chicken interest in our platform in Europe, driven by awareness of the successful implementation was nothing more can discount.

And widespread accolades and increasing interest in Holy Grail recycling initiative.

Our first major retail customer in Europe was publicly identified with industry recognition for our mutual success.

Digimarc another were recognized with the top supplier retail 2020 award from the each site retail Institute for adding Digimarc barcode to their private label brand packaging.

With the outstanding supportive meadows packaging suppliers shock and we pack.

We have made rapid progress in deployment with more than 2000 enhanced products on shelf in more than 4000 stores.

As with Walmart, you're discussing other uses of our platform to improve operations and customer experience.

We play a role in many aspects of the circular economy, including responsible package design consumer education collection, which sortation.

Holy Grail is focused on with sortation.

Program was a huge success, culminating in an impressive demonstration in October of application of our platform to waste story.

That lead into winning many awards and accolades and a feature story on BBC.

Organization HD tool is underway the primary goal over the next phase is determined unaffected path to commercialization.

As the organization as being formed we have engaged with Tom or to create a specification for detection module.

I am very global Pet CT Sidel, LPI, LNA and others on how to apply our software to plastic malls.

Leadership tells us that they have confirmed interest from 160 stakeholders, including brand owners retailers resin suppliers converters packaging suppliers Green Das trade associations and other interested parties. There were 29 participants in the original fully grow project.

This initiative is being closely watched by relevant European government agencies and lawmakers.

There are nearly 60 retailers and global brands among the HD too interested parties, the majority of whom are not yet customers with digimarc.

This alone could result in more than two dozen new customer relationships.

Absent programs for sale to members once the initiative kicks off.

And you stepped up as a leading implemented better what it announced last week that were nor unstoppable and very brands will pioneer application Holy Grail, using the digimarc platform to improve recycling of their packaging.

The other brands will step up to support our critical role in this initiative.

We have also several proposals for paid pilots was recyclers in several European countries for consideration as well.

In addition, we're pulling venture capital and foundations for R&D funding to support Holy Grail too.

Holy Grail, two is not the only path forward and sustainability that we're pursuing discussions are underway with many other interested parties concerning the funding and development of this application of our platform.

In Europe in the U.S. and elsewhere abroad.

For instance, we have recently engaged with Walmart just one on the consumer goods formal discussions concerning our role in the circular economy and the need for industry leaders to provide directions support for our efforts with a focus on responsible package design and more effective supply chain management.

Discussions are synchronizes with major users of plastic packaging on the path from R&D to global standards.

Meetings listening advice impossible participation.

Funding for these activities.

Further demonstrating our relevance and expediting progress we're assessing how currently has announced packages and label support the circular economy.

And how this work related opportunities to reduce packaging carbon footprint and ways through the product lifecycle.

We have shown the ability to reduce waste to manufacturing through improved parts matching.

You all are familiar with our work with Walmart for instance, on reducing food waste.

We showed examples of enhancement of Clamshells typically use for the sale of fresh berries that NRF supporting food safety and reduction in waste.

And that same program, we are exploring means to improve recycling of that packaging.

Which today is very low recovery rates, we're working with a leading very producer in an understanding that our work with done we'll be shared with industry.

Although there is not the same level government pressure here versus Europe, there was a substantially growing interest in mitigating the carbon footprint of on many of our customers.

This is motivating actually among suppliers such as a new use cases being explored but I'd be on feet Trust for track and trace number strat very global core tomorrow than others for improving plastics packaging designs.

The supply chain is growing and becoming more receptive as we move to scale production with industry leaders in retail and CPG.

Several of them are assuming more responsibility for application development and maintenance and system integration as evidenced in our success window.

Software is getting better as is our support and business model. Our mission is to improve and expand the basic functions of the platform and the quality of our support for these suppliers.

We have created a global interactive map of the supplier ecosystem to help those who can benefit from the platform locate communicate with local suppliers that are networks.

We have observed generally accelerating rate of growth embark with bookings and revenue since early 2018, evidencing effective execution of strategy to grow.

We are using our platform can be trapped in our media channels and numerous trade defense was on our website.

Effective management of working capital is always a priority our outreach to perspective strategic investors as provided valuable insights about the direction and positioning leading us to refine our focus in the late in the path forward towards optimal partnerships.

Our work and sustainability is also opened doors to possible additional funding sources based on recycling.

The December quarter 13, that's report showed an uptick in investment by European funds.

Planning a non deal roadshows seem to enter does introduce us more broadly in that community, where there has not so much positive news lately.

In terms of key takeaways.

Barcode revenues more than doubled in 2019, as we entered into production agreements with two of the world's leading retailers and gained ground global consumer brands.

We are in the final stages of packaging implementation with wegmans tightening up loose ends a means to complete the roll up to maximize the ROI from the now substantially complete private packaging transformation.

The move to to production with Nadeau in Walmart, each and the owned right significant milestone for our company.

No. It was the first supplier Lynn packaging implementation for major retailer.

Walmart the world's largest retailers is employing the same approach.

This transition to supplier, let account management is an important strategic milestones.

Our end user focuses on earning the trust and respect to Walmart facilitating enterprise wide adoption of our platform and in the process spinning up the capabilities in their massive global supply chain.

We have more openness to collaboration from suppliers than ever before.

We had a successful demonstration of sorting capabilities in October.

Holy Grail, one two major awards Holy Grail two data.

Formation is progressing and we're exploring other opportunities in parallel.

We work to ramp revenues, an increase margins, we will continue to explore all sources of working capital.

Including potential strategic in European investments and non traditional sources, including venture funds and foundations focused on the us G.

That's it for our prepared remarks for today now we'll open the cold questions.

Ladies and gentlemen ask a question at this time. Please press star and then the number one on your telephone keypad once again that a star and then the number one if he'd like to ask a question and we will pause for just a moment.

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And your first comes from the line of Mike Ditka with Needham and.

Hi, guys. Thanks for taking the questions today I appreciate it.

Wanted to ask you about that contract renegotiation that you guys are working through right now.

Can you give us a sense of where there any bookings that came through on this contract in Q4 that was just a follow up until you guys go through the three negotiation process.

And there were no bookings in Q4 related to that contract, we're hoping to wrap that contract in Q1, which would that result in booking.

Okay and then.

For clarity here is that there's going to be less let's fix more variable component is the expectation for that contract.

I guess the anticipation then is that lower short term bookings and revenues in the near term.

Can you help us understand whats the greater upside potential stemming from that contract that was confused by that comment.

Okay.

The the prior contract at ahead of fixed fee.

And the new contract has a lower fixed fee with the variable component in order to allow us to be paid more for growth in that business.

I think.

And then one more if I may just coming back to the.

The Walmart with the the system integration issues that you guys are facing.

Doesnt seem like it's anything on your end there.

But what what gives you the confidence in being able to start delivering those labels during Q2 to stores is it customer conversations there.

Just anything that would be helpful.

Yes, its regular developer updates so nearly daily updates that I personally have received good mid continent.

All right I'll jump back in the queue. Thank you guys.

All right.

And ladies and gentlemen, just as a reminder, if he'd like to ask a question. Please press star in the number one on your telephone keypad.

And your next question comes from the line of Jeff Van Rhee with Craig Hallum.

Hey, guys. This is I agree on for Jeff.

A couple of questions for me warning, let's start with Neto I think.

A couple of quarters you guys said you were expecting via 3000 skews.

By the end of year that gets article the other day on more may been prepared remarks that was 2000 currently and then also I'm curious if there's anything that you guys have learned from that roll out you know at the records on in the stores or there are there any ROI metrics that you guys could share.

What is maybe anything that has seen from it I am just any additional color there would be great.

Okay first with respect to us, saying of 3000 the metal off.

Pretty confident no. One here said that so you may read somewhere from someone else.

Yes so.

It's it's more than 2000 today, which is.

More than I think anyone would have expected in the short term that we've been working with them.

As I did evidences maturation of our.

Deliberate capabilities and that was done by suppliers not us even better.

In terms of how it's going in the in the stores I think that's evidenced by the awards that were received by other press that is going on in Germany, right now favorable press.

Including interviews with wasn't meadow and their basic infrastructure is in place so they're enjoying the benefits isn't real time.

Got it and then also commented briefly on.

So to some learnings that you had in the quarter from discussions.

With potential strategic could you just expand on that a bit in terms of what what's your take ways were and maybe how we should think about the potential for strategic going forward.

Yes, we've talked to many of the big players now and so that's a very unusual environment for such discussions because of the enormous success of the largest I.T. companies.

And they're very high.

Marc Jacobs.

On their sense of sort of unrestrained growth so.

Typically in talking to large companies you would be saying.

Better Act quickly because we're going down the street two to your competitor and if you just think about the largest companies who would be excellent partners of ours. So.

Thats not a very strong argument these days.

And so we we really need to demonstrate.

The both the short term and long term relevance of our business to their business on a pretty detailed level.

In order to get the kind of engagement that we want.

Got it got and then lastly, if it could just real quick.

Amazon opened their first for.

Cash here in the store today, just any thoughts there on sort of longer term central fresh to what you guys are vision with Digimarc.

Yes, it's a little bit of the upper has not closed its not a full size stores are they call in grocery store rather than their first model, which my call snapshot or Delhi.

So it's not not nearly as big as the mass merchants smaller them.

Walmart neighborhood markets is.

It's an effort to scale, some and we'll see how it goes but I would suggest to anyone who is interested among our shareholder base to go wander around the Amazon goes to our if you have any that are reasonably accessible to you and.

Study the lack of crowds.

Yes.

I understand what they're doing them to many of their stores.

And.

There is some appeal for some demographic for some shopping.

But listen to see how the grocery shopping goes so it's a small supermarket.

And we will study and carefully.

But thus far we have not seen.

The ROI that one might want to see from the amazingly large investments necessary to.

Great those stores and also take a look at how many store personnel are around to the nature of the products on the shelves in the effective use of floor space all those things. It look at all those things just don't read the PR.

Because of Amazon doses outstanding job would PR.

Got it okay, great. Thanks, I'll hop back in queue. Thank you.

Did you have a follow up questions from the line of Mike Cikos with Needham and company.

Hey, guys. Thanks for taking the quick follow up just two items here first on the Opex I know that you're guiding to that 10% increase in Q1 to 13.6 at $13.8 million.

Just wanted to get my arms around that so.

Are there one time items that are going to be impacting that Q1, I know that you're you're hiring and do you have that compensation adjustments and the increased head count, but I got to imagine that that might decline depending on trade shows and RF audits.

Just anything that would be beneficial if we look out for the rest of the year.

Yes, it's a combination as he said compensation adjustments and headcount adds which would have impact obviously the rest of year and then also some nonrecurring items. So obviously, we have a big trade show in the first quarter. We also have or you're not it and then there's some also some additional kind of nonrecurring sales and marketing initiatives that we have in the first quarter.

Sure.

Kind of it.

I was going to ask.

Hi.

Nonrecurring items.

Yes, the nonrecurring.

Three quarters of a million dollars roughly.

Up to three components.

Okay. Thank you for that and then the second item.

I know that the.

Service revenues from that program work with the central banks came down to a timing issue just wanted to get a sense could you help us size up.

This is service work and I just wanted to ask.

In conjunction with that should we expect that to come through in Q1 or do you have a visibility into when that does have you guys.

Yes, it's effectively so we havent generally a fixed budget, but the central banks for the year, we didnt more of that work in the first nine months.

So.

It's specific to 2019, it's not anything that would carry over we just did more of an earlier in the years. So there was less of the budget to use in the site in the fourth quarter.

So it's purely timing the amount of revenue that we received from the central banks. This year was in line with the budget and our expectations is just the timing of the work.

Then I guess, if we look at 2020 them based on that fixed budget is the expectation right now that it will be more spread out over the course of the year or are we expecting again more condensed into those first three quarters of the year.

It will be somewhat dependent upon so most of the budgets fix there are variable components and the variable components are more challenging to predict when those will occur.

But generally we do and train front load. So that we don't get caught it ended the year with more work to do than we have resources book.

So I would say that 2019 would be a pretty good indicator of what I would expect for 2020 by what growth in the overall budget that were working well.

Alright, Thanks again for the follow up guys.

You're welcome but.

And at this time I'd like to turn the call back over to Mr., Barry Davis for any closing remarks.

All right. Thanks, very much everyone for participating we'll look forward updating you again soon.

And thank you for your continuing support bye for now.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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