Q1 2020 Earnings Call

Thank you for participating in today's conference calls now I will turn the call ever to Bruce Davis, Chairman and CEO Digimarc Mr. Davis. Please proceed.

Thank you good afternoon.

Come to our conference calls Charles Burkert, those with me.

On the call today will review Q1 financial results discuss significant business develops and market conditions and provide an update on progress in execution strategy.

We've posted these prepared remarks on the Investor Relations section of our website and will archived webcast there.

Please note that we may make certain forward looking statements on this call and on the prepared remarks, we filed with the FCC and posted on our website under the heading safe Harbor statement regarding revenue recognition matters results of operations investments initiatives perspectives on business partners customers and prospects industry trends on growth strategies.

Also will discuss from time to find information provided to us by our partners and actual central customers. We are providing this information as we understand it was represented to US we did not verified or bucks for such information all such statements information are subject to many assumptions risks uncertainties and changes in circumstances.

How do you assumptions, which are about future performance represent a point in time customer actual results may vary materially from those expressed or implied by such statements. We expressly disclaim any obligation to revise or update statements or other information. We provide during this call to reflect events or circumstances arise. After the date of this conference call for more information about risk factors that may cause actual.

Our results to differ from expectations. Please see the company's filings with the FCC included in the form 10-Q that we expect to file shortly.

Any links included in our prepared remarks, the provider for general information about context, only the contact references not incorporated by reference and you should not consider part of this presentation, but did not verified nor boat for such information.

Personal I'll comment on our financial results not all discuss significant business developments market conditions that execution strategy Charles.

Thank you very good afternoon, everyone.

First off you may have noticed some changes to our income statement.

We revised our income statement visibility into the return on investment and growth initiatives targeting retailers and get cheaper brand owners and the facilitate more effective comparisons with their peers.

We incorporated license revenue into subscription revenue and reclassified a small amount of revenue from subscription service.

We've also incorporated intellectual property expense and the general and administrative expense.

He's trying it does reflect the evolution of our business from IP licensing to provision of software and services based on our auto identification platform.

The focus of patent development has shifted for monetization to support licensing of our software.

The designation so Barcoding Guardian are no longer relevant considering our approach to platform monetization.

Assessment of return on investment that's facilitated you're reporting revenue by target markets.

The key market categories or government retail and media.

Government includes services and subscriptions provided to the central banks and other government agencies.

Retail include services and subscriptions provided to retailers brands their suppliers and related solution providers.

It was mostly what we used to refer to as barcode revenue, but also includes revenue from retail customers formally categorizes Guardian and license revenue.

Media includes all of their services and subscriptions provided the media Entertainment education another customers.

RIDEA comprises mostly what we used to refer to as Guardian and license revenue, but also includes barcode for commercial print and audio for non retail customers.

We anticipate adding other market categories as the business expands to facilitate your evaluation of our investment spending in returns.

Given that retail if the primary area of investment a driver for top line growth will focus disclosure on retail bookings in our quarterly reports.

Looking for government and media are relatively consistent year over year, and therefore, we do not.

We intend to disclose bookings in these areas unless we observe something that is likely significantly impact those trends.

We have recast the 2019 bookings and revenue figures, we provided last year to reflect this new reporting structure.

Recasts had minimal impact on the classifications of amounts previously reported.

No matter, where Q1 results.

Revenue for the first quarter was 6.2 million, an increase of 500000 or 9% from the first quarter last year.

Subscription revenue increased 33% to 2.5 million well services revenue was essentially flat.

Revenue for retail was up 70% to 1.3 million from 700000 Q1 last year.

Revenue from government and media was essentially flat at 4 million a 900000, respectively.

Most of our revenues are recurring.

Q1, retail bookings, which includes bookings from contracts with retailers brands their suppliers and related solution providers doubled to 1.8 million up from 900000 in Q1 last year.

Bookings included 450000 for the contract renegotiation that we mentioned on her last earnings call with our supplier partner focused on supply chain improvements.

As we expected the fixed amount of the new contract is lower than the original the program has potential upside in the future as it expands to more customers.

What's working for the quarter was 64% up from 62% last year, primarily reflecting.

The impact of higher subscription revenue.

Subscription margin was 79% while service margin was 55%.

Operating expenses were 13 million an increase of 7% from Q1 last year, primarily reflect reflecting increased headcount to address growing demand and delivery requirements and routine annual compensation adjustments for employees.

Operating expenses were below the low end of the range of 13.6 to 13.8 million that we provided on our last earnings call due to cost cuts in deferrals.

We will continue to closely monitor our product in financial markets and our sales pipeline in relation to our working capital on hand in managing our rate of investment.

Net loss for Q1 was 80.9 million or 74 cents per diluted share versus a net loss of 8.5 million or 74 cents per diluted share in the first quarter last year.

Strategic financing discussions have been pause because potential investors assess their circumstances.

For the market collapse due to the pandemic, we raised 600000 of capital under the ATM program. They selling 20000 shares at an average price of $22.

There are substantial uncertainty and volatility and small <unk> small cap sector of the stock market that has negatively impacted our share price, which is inhibiting potential use of the ATM.

After the ended the quarter, we received the Paycheck protection program loan that will give us more time to observe financial market trends and assess the effects of the pandemic on our prospects to determine the best course of action concerning financing the business.

I will summarize the detailed alone in a moment.

We invested 6.2 million of working capital during Q1 below the low end of the range of seven to 8 million, we provided on the last earnings call.

In addition to the ATM proceeds we were able to reduce our cash spend from initial estimates by deferring head count additions capital expenditures and other discretionary spending.

On April 16th we executed a promissory note with Stearns bank for $5 million pursuant to the Paycheck protection program under the carriers out there.

The note matures and 24 months bears interest at 1% per annum.

Provides for six months of payment deferral and requires no collateral or guarantees.

I noticed also subject to forgiveness provision to the program.

Not to be forgiveness determine based on the amount of alone used to pay for qualified payroll costs, including group health care benefits rent and utilities for the first eight weeks after the nobody's issue.

We anticipate a significant majority the loan amount will be forgive me.

We ended the quarter prior to receiving the loan proceeds was 30.6 million in cash and investments.

You will continue to be careful in spending bring open head count positions in capex, where possible and cutting or eliminating professional service fees as with other expenses.

For instance, we anticipate future cost savings as the old results of moving public relations and Investor Relations in house with the hiring of a senior director of corporate Communications I.

I believe this move will have the added benefit of a more nuanced understanding of our execution of strategy and relationship with our shareholders.

We anticipate operating expenses in the second quarter to be between 12, and 12 and a half million dollars.

We expect cash usage in the second quarter to be between 1 million and 2 million after reflecting the 5 million of loan proceeds received in April.

Further discussion of our financial results and recent prospects for business. Please see our form 10-Q that we expect to follow shortly.

I will now provide his comments on significant business development market conditions and execution strategy.

Thanks Charles.

Our company has responded effectively to the pin debit cards so far.

First stage responds focused on health and safety of our employees. The next stage focused on productivity up an entirely remote workforce, providing tools training and support to optimize the workstreams. Most they just have been executed well.

In parallel we grew revenues reduced expenses unsecured interim financing via the paycheck protection program.

Our focus now is on assessing the effects of the crisis on our business prospects short and long term.

The bundle because resulted in many changes and how the world operates the path and pace of economic recovery and the shape of the new normal are uncertain.

Your next on our business are difficult to predict.

These uncertainties, let us to apply for and receive a paycheck protection program loan.

This gives us a little more time to assess what the new normal will look like.

The timing in nature of the past there and its implications for our business.

PPP loan is having the intended effect of allowing us more time to assess how our business will go before making any significant changes to our business.

As you see from the Q1 results.

On reducing expenses wherever possible without reducing our workforce or disrupting the productivity of our employees.

Given the nature of our work in the skills required PPR team intact is very important to achieving our goals.

We took that has been dramatically affected by the pandemic.

We believe our important starts increased.

Shoppers concerned about health and safety of affected how they choose to shop with much more online purchasing and what they shop for considering the loss of income and uncertainties about the path forward.

Automatic identification is a key to addressing necessary changes for retailers other suppliers to.

Digimarc has an important role to play in many aspects of their businesses to improve health safety and productivity.

The fundamental signaling tecnonet techniques, a massive mathematical and graphical redundancy of our platform outperformed traditional barcodes and ease of use reliability and efficiency throughout demand and supply cycles. These advantages are more important than ever due to the Covance 19 wrote a virus epidemic.

Q1 was a busy quarter for engagement with retailers and consumer brand owners. Following on a very successful in a rough we've made great progress during the quarter with suppliers on select end users and improving our platform support for applications spending to full product lifecycle.

With that said, it's a very unusual Todd.

Lots of venture Big.

There are increases in both demand the deferrals.

It's a burden as the among some prospects a distraction from other priorities for others.

I am optimistic about our long term prospects and increasingly confident in the value of our work my greatest concern to still the pace of progress in relation to access to capital.

We have no inventory.

No supply chain risks, we licensed software, we have a terrific foundation or recurring revenues with the central banks some Walmart.

We have improved working capital with the ATM in the PPP low.

The loan will be very helpful and bridging the gap of uncertainties, we face from the pandemic.

So far business with existing customers is healthy subjects to my pacing comments, a few moments ago.

We're in the final stages of packaging implementation with wegmans working on means to maximize the ROI from Dow substantially complete private packaging transformation.

Better progress continues apace.

Well my private brand house, what is going great.

We have begun expansion to the general merchandise.

Thermal labels were initially slowed by integration with a critical supplier that looks to have been resolved. The software is in test.

Moving to the stores may still happen in Q2, but does that risk higher priorities flowing from the pandemic response.

In the meantime.

Support for Walmart continues to expand most recently.

And in store Entertainment marketing pursuant to this statement of work active bidding in store signage for movie properties to improve consumer engagement.

We're also working directly with some products suppliers to activate their in store print advertising.

Industry is taking notice of our progress work has begun with another top five U.S. retailer.

Beginning with a focus on what are known as bottom of the basket items to help reduce shrink at checkout.

Which I called options expanding this is becoming a greater concern.

There's also evidence of momentum in Europe, where nadeau successes inspiring sales progress in negotiations with the leading retailers. There of course, all this isn't tangled up the complications flowing from the pent up.

Nevertheless, we find this very encouraging and consistent with our theory of market development.

Grocery our target market is the most robust robust sector of the economy grocery retailers around the front lines.

And redefining the shopping experience.

There was an increasing appreciation the digimarc helped transform retail into a safer and more productive experience for example, digimarc on packaging. The labels can speed up all forms of checkout averages congestion in stores and able Scana go models for less person to person contact while reducing head king of items them.

Providing for less package handling.

And enable faster pick and pack for store employees to fulfill mobile orders and curbside pickup said cetera.

I think little touched shopping.

We recently initiated a campaign targeting more than 100 grocers in the U.S. and Europe outbound, calling efforts are underway digital and social marketing and a webinars plan for Jim. The campaign is designed to foster brought understanding of Digimarc benefits industry accomplishments inspire conversations with decision makers and these accounts.

And influence retail technology plans and budgets as these retailers look for new ways to digitize store operations and supply chains for greater safety and efficiency.

Our supplier network is growing at a rapid pace has also more openness to collaboration from suppliers than ever before.

Increasing inquires from interested pre media and printing companies around the world.

Let us to create fee based supplier services bundles as a way for these companies to get educated Digimarc for packaging.

Provided access to our platform software and tools.

We are making a quick easy an inexpensive for them to get started with three tiered bundles to choose from based on their specific needs.

We continue to educate the supplier and academic community recently, completing a training program with Clemson University students.

Plenty webinars with one of the leading printing associations the summer.

As previously reported we had hiccup in one of our supply chain oriented developers in Q4 that impact bookings growth when unrelated corporate events, there led to a sudden widespread cost cutting efforts.

We have successfully renegotiated that contract although the company has recently gotten involved.

We're assessing existing customer relationships and prospects to determine the optimal path forward for the do collaboration.

Effects of the pandemic and other suppliers is difficult to assess in the near term there have not been other notable disruption since the outbreak.

In Europe, Holy Grail, two may finally be getting organized.

We've been negotiated govern disagreement with the potential leader for the industry initiative.

License agreements with leading leased equipment suppliers and Golden threat projects in several countries Golden threads. Our consortia led at the end studies of the impact of Digimarc platform on the circular economy.

In the meantime, PNG is moving forward with products in several of their brands for initial distribution to Germany and the UK.

We expect more cpgs to go lives in 2020.

There are increasing investments that there's more capable infrastructure by several leading retailers in Europe and the supplier network does expanding all encouraging signs.

We're also seeing some signs of traction in Japan.

For example, we're collaborating with supply.

Supplier partners in a pilot program with one of the largest logistics companies in Japan.

They are using our thermal label software to create serialized codes to improve the efficiency and reliability of tracking roll box pallets within warehouses and delivery trucks.

Adoption by retailers in Japan has been slowed by less effective scanners that from a store compared to the U.S. in Europe.

We're working with relevant suppliers to remedy the situation.

There is an important retailer interest once these matters have been resolved.

Serialization is emerging as a significant new source of demand.

The primary use cases or track and trace brand protection and other supply chain applications.

New approaches for applying Digimarc post print, including laser ablation, a marker code or overprint thing, we're opening doors for digimarc, allowing us to leapfrog the slowly evolving digital printing market that was previously governed the pace of adoption of our platform for serialization.

Our work with initial customers indicates our superiority over QR codes data matrix, and just 128 and first pass read rates lower inc. use and faster scanned speeds.

The primary use cases, our track and trace and brand protection.

We are developing several new customer supplier relationships in this area.

It's a very exciting time in R&D, where we've had some amazing accomplishments during the quarter.

Pilot of automatic enhancement, which would dramatically reduced enhancement cost in time for some packages.

Warping tool to minimize the effects of geometric distortion supporting a portion important customer industry initiatives regarding plastic packaging.

Leaves retching, a bold designed to expand the coverage digimarc barcode and complex package designs containing plastic substrates.

Support for numerous business opportunities with industry leaders and fast moving consumer package goods, a quick service restaurants.

And optimization elaboration of apparel announcement involving several suppliers and perspective customers. The platform is expanding a maturing.

We published an important technical and market analysis White paper earlier today.

Entitled Beyond the U.P.C., Digimarc makes retail operations safer and more profitable.

It summarizes findings of the just one U.S. sponsored study explaining we till the retail industries need to move beyond you PC.

Provides a detailed technical case for the superiority digimarc barcode over all other potential successor data carriers.

I recommend that you read it to better understand our role in the future of automatic identification for retail.

Explains our general superiority.

Oh for example, we address problems posed by the pandemic like no. Other barcode just as we do for plastics recycling and sustainability I'm more confident than ever Digimarc barcode is the successor to the you PC and we will have a profound impact on the global supply chain.

Carlos describe changes in our financial statements. Some related measures that are intended to facilitate better analysis of our execution strategy.

We have observed a generally accelerating rate of growth in these measures since early 2018, consistent with effective execution.

Detailed updates of expanded use of our platform can be tracked on our website and other media channels.

We will be engaging a more outreach to you and the rest of the investment community once our new director of corporate Communications gets settled in.

The loan from the federal government is serving its intended purpose, giving us time to further assess the impact of the pandemic.

Even the important role that our platform can play and health safety and efficient retail and supply chain that pandemic effects on the nature of shopping they'd better encouraged adoption as we help retailers and consumer brand owners adapt to the new normal where reliable efficient auto identification as a cornerstone.

On the other him the health and economic uncertainties, the big touching the pace.

Change more difficult than ever.

We are managing working capital carefully encouraging in facilitating extraordinary efforts by our team doing the best we can to articulate our value to customers and suppliers.

That's helpful. The Paycheck protection program, we will traverse depends on the disruption.

Factors in our favor include growing bookings and revenues enough cash to fund operations through 2020, no inventory no supply chain risk.

Walmart and central banks is our largest customers target market. That's the most robust sector of the economy.

Platform that addresses needs aggravated by the pandemic.

The key takeaways include Q1 revenues and EPS exceeded analysts' estimates total revenue grew 9% year over year subscription revenue was up 33%.

Retail bookings doubled.

Our balance sheet was strengthened with the influx of capital from the ATM in the PPP loan our largest customers are central banks, and Walmart, where the footprint continues to expand.

We're in the final stages of packaging implementations wegmans discussing means to maximize the ROI from the now substantially complete private brand packaging transformation.

There's more openness to collaboration from suppliers than ever before.

HD too low.

Formation is progressing vitally negotiations are underway with the potential leader brands equipment suppliers and Golden thread consortium.

The Paycheck protection program loan has boosted working capital most of it is expected to be forgive the.

Our target market is the most robust sector of the economy grocery.

Social just to see will pressure physical retail to increase efficiency.

Shopping at retail operations management will elevate the importance of low touch.

Our platform addresses the needs aggravated by the end done it.

Likely making digimarc long term beneficiary of the crisis.

We will continue to effectively manage working capital.

Hopefully the BPP loan is a bridge to a healthier and more predictable capital market resumption of strategic investment discussions.

Further proof of unrecognized business value and fostering a safer and more productive retail environment.

In the meantime, we will continue to manage our capital carefully as we make our platform more efficient reliable and robust.

Expand application support and that customers and suppliers.

The remarks important role in facilitating safe and efficient retail has been accepts sector weighted by the krona virus crisis.

The effective management of working capital remains a critical concern.

Let the company for 23 years during which time, we've overcome many challenges.

We will work our way through this one too.

Thank you for your support of our mission and confidence in our ability to achieve it.

We wish you all the best in these difficult times.

Well, that's it for our prepared remarks, and now we'll open the call to questions.

Thank you Sir you asked a question you want me to press Star one on your telephone.

Your question press the pound.

I will be compared to Q1 day roster.

And again that star one if you would like to answer your question at this time.

Mr. Davis there.

Just one question in queue.

Yes.

With Craig Hallum.

Great. Thanks, Thanks for taking my question guys couple from me.

The Bruce just one quick clarification I think in the script. When you were talking about the the bookings that pushed from Q4 to Q1, you said pulled another company has gotten involved I'm not clear with that and that maybe you could just clarify on that and I had two follow ups.

Yeah, so or.

Contract that Oh cut Oh changed was with the supplier it now that supplier and another supplier are going to be participating together.

The original supplier will be transitioning some of their responsibilities over to a different suppliers. So the three of us are getting together and having discussions about.

I would have an effective collaboration.

We'll probably for the EMEA not adequately making announcement about this sometime in not too distant future.

Got it Okay, and then in terms the barcode pipeline coming into the into the impacts of Corona you just talk about kind of the developments in the near term deals you saw prior to the some more severe impacts of Corona and then any any sort of up to date have read on where those.

Deals might be in terms of you know how their coping and I'm, assuming a pause, but just maybe a sense of how the pipe was going in at least.

Sure Us so.

Thanks, something supposed to something's of accelerated as I pointed out in the script data. It's a it's a bit tubs gets a friend Oh, what you would expect because of the uncertainties in the economy.

And and particularly in retail operations and the suppliers to retail.

I would say on the whole, there's a greater sense of urgency I did increasing appreciation of the benefits that we provided what is expected to be the new normal the do normal not.

Capable of being entirely described just yet, but the probably including people feeling more nervous about safety and health on there being a general desire to have low touch as an expression as being use now in the industry.

Low touch shopping low touch operations.

And then.

I I think it up significantly increased need for efficiency because of lower productivity from the real estate for place based retailers.

And everyone in the supply chain and you certainly have seen in many places.

The new spacing requirements, and a and plastic fields on P.B.E.

That's going to change the economics of many of our suppliers and customers in ways that cry out for greater efficiency and auto identification is the classic tool.

Of increasing efficiency of the demand and supply chains.

So I'd say definitely on its little hard to tell because it's only been about six six or eight weeks now that there has been the.

Full recognition of the crisis.

But.

We have some new demand because of that we have increased demand because of it and we have delays because of it [laughter]. It's it up.

A bit hard to sort out just yet I do hope and I don't know how to predict how the health aspect of this is going to like the rollout as people try to move back out of filter in place if another crisis emerges who the hell knows but.

If they do find a way or at least through the summer months to regain some semblance of what.

I think it looked like in the past I do think there'll be enduring changes that again create increased demand for our platform.

Got it Okay, and Charles I think yeah, you mentioned that the bookings obviously, you've changed the way you're reporting them that the bookings have been recast do you have to bookings the way you in terms of retail bookings for Q4 for last year's Q2, three and poor handy.

Yes, I do and they didn't change more than 100 grant or some of its rounding but I can so it was 900000 in Q1.

1.8 million in Q2 1.2 million in Q3, and 1.4 million in Q4.

Perfect. Okay, great. Thanks, much guys.

And.

Good question at this time simply press Star then the number one on your telephone keypad.

Okay.

And there are no further questions at this time.

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Yes, Sir please proceed.

Alright.

Thanks again, everyone for for your support and then as I said, the thus far we've managed very effectively.

Through the effects of the of the pandemic and we.

I feel confident we will do a good job continuing to manage through its implications to some.

New normal, but I'm optimistic the new normal will be one in which we play a more important role.

And the the uncertainty that exist today regards the pace of negotiations and implementations because of the changes in the availability.

Oh, the labor and travel.

And Ah I think we'll work our way through it.

With the help of the PPP loan that's been really helpful.

In addition to working capital that will.

Bob carry us through.

The most uncertain times and so I look forward to talking to you again, Oh and the next conference call and thank you for your support so goodbye for now.

So.

Today's conference call. Thank you, ladies and gentlemen for joining us for presentation you may now disconnect.

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