Q3 2022 Digimarc Corp Earnings Call
Good day and welcome to TPG, Mark Q3, 2022 earnings conference call.
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I'd now like to turn the conference over to Mr. Joe Meyer Chief Legal Officer. Please go ahead Sir.
Thank you.
Welcome to our Q3 conference call Riley Mccormack, our CEO and Charles Beck, Our CFO are with me on the call.
On the call today, we will discuss Q3 financial results and provide a business update this will be followed by a question and answer Forum.
We have posted and prepared 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.
Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.
Charles will now comment on our Q3 financial results.
Thank you, Joe and Hello, everyone.
First year commercial bookings were $3 2 million during the third quarter compared to $2 9 million in Q3 last year.
In Q3 last year included 600000 from our piracy intelligence product that we are now nearly complete and winding down.
There will be no future bookings from this product category.
Excluding piracy intelligence or push your commercial bookings increased 800000, or <unk> 35 per cent.
Bookings for the quarter included $1 2 million from a new multiyear agreement, we signed in Q3 with Walmart.
The new agreement provides for a minimum payment of $2 7 million in year, one and more than doubled to $5 8 million in year two.
These minimum payments are incremental to the 3 million annual payments, we received under the existing agreement.
We expect the remaining contract value of $7 3 million to be booked in the fourth quarter upon receiving customer acceptance.
I think we will have more to say about this exciting new development later in the call.
Revenue for the third quarter was $7 8 million up 22% from $6 4 million in Q3 last year.
Subscription revenue grew 64% in the quarter from $2 5 million to $4 1 million.
The new Walmart contract provided for $1 1 million of subscription revenue during the quarter.
We expect a similar quarterly revenue run rate for this contract over the next seven quarters with potential upside above the minimum payments.
Beyond the Walmart contract there are two offsetting factors impacting our year over year growth.
The addition of subscription revenue from everything offset by the decline in subscription revenue from sunsetting, a piracy intelligence product.
The impact of Sunsetting this product in the quarter was in line with our expectations of 600000 less revenue than Q3 last year.
There will be a similar year over year variance in the fourth quarter.
Excluding piracy intelligence subscription revenue increased $2 2 million nearly 120% year over year.
Service revenue was $3 7 million in the quarter compared to $3 9 million in Q3 last year.
The change is largely due to the timing of Holy Grail, two point or recycling work as we had significant project work last year, but phase II has since completed.
Gross margin for the quarter was 53% compared to 66% in Q3 last year.
The decrease in margin reflects $1 million of amortization expense recorded on acquired intangible assets recognized in the acquisition accounting for everything.
Excluding the amortization subscription margins were 75% and service margins were 57%.
non-GAAP gross profit margin, which excludes amortization expense and stock based compensation expense was 72% for the quarter compared to 71% in Q3 last year.
Operating expenses for the quarter was $19 7 million compared to $12 2 million in Q3 last year.
The increase reflects $4 1 million of operating expenses from everything post acquisition and $1 4 million of one time severance costs incurred for organizational changes we made during the quarter.
The severance costs were comprised of 800000 of cash costs and 600000 of stock based compensation expense.
These organizational changes were made to streamline the business in order to better optimize our go to market strategy.
Excluding the impact of everything and the severance charge operating expenses were $2 million higher year over year, which included $1 7 million from higher compensation cost from annual compensation adjustments and higher head count.
Half of the $1 7 million increase in compensation cost was in the form of stock based compensation.
The increase in compensation and headcount since last year has been necessary in order to retain and attract the talent we need on the team to accelerate our go to market strategy.
non-GAAP operating expenses for the quarter was $15 5 million compared to $10 1 million in Q3 last year.
The increase reflects $3 3 million of non-GAAP operating expenses from everything post acquisition and 800000 from the onetime severance cost I just referenced.
While these severance costs are onetime in nature severance itself is not a nonrecurring activity. So we do not back it out in determining our non-GAAP measures.
Excluding the impact of everything in the cash severance charge non-GAAP operating expenses were $1 3 million higher year over year, which included 800000 from higher cash compensation cost from annual compensation adjustments and higher head count.
As part of the organizational changes to optimize operations, we reorganized some of our reporting structures, which impacted the classification of head count and related costs between departments.
This is evident in comparing Q3 operating expenses to Q2, whereby R&D and engineering increased while sales and marketing and G&A decreased.
Net loss per common share for the quarter was 76 cents versus <unk> 17 in Q3 last year.
The net loss in Q3 last year was benefited by a $5 1 million nonrecurring gain in other income.
non-GAAP net loss per common share, which excludes this $5 1 million gain last year was <unk> 47 versus <unk> 34 in Q3 last year.
We ended the quarter with $56 4 million in cash and investments.
We used $12 million of cash and investments during the quarter compared to $8 6 million in Q3 last year.
The increase reflects cash usage by everything post acquisition and 700000 of the 800000 of onetime cash severance costs that were paid during the quarter.
Excluding the severance cost cash usage would have been $11 3 million.
Last quarter I mentioned that internally, we look at non-GAAP .
Net loss, which excludes noncash expenses and layer on cash used for capital expenditures and share repurchases as our metric to estimate normalized levels of cash flow.
For the third quarter. This metric was $10 1 million factoring in our non-GAAP net loss of $9 3 million plus.
Plus 200000 of capital expenditures and 600000 and for share repurchases.
The difference between the $11 3 million of cash used after excluding the cash severance and the $10 1 million as the timing of cash receipts and payments.
We anticipate the swinging in a favorable direction in Q4.
For further discussion of our financial results and risks and prospects for our business. Please refer to our Form 10-Q that will be filed with the SEC.
Rather we will now provide a business update thanks.
Thanks Charles.
We made progress on many fronts in Q3, but without a doubt the highlight of the quarter was the deal we signed with Walmart covering and expanded deployment of the <unk> illuminate platform at <unk>.
I'm confident you all have many questions about what exactly we are doing with Walmart and what new use case will be powered by this expanded deployment of our platform capabilities.
Please note that we are equally eager to discuss this incredibly exciting development and plan to when the time is right.
Until then.
Not a whole lot more we can say.
So I would stay tuned for more details in the not too distant future.
I do want to spend some time frame any opportunity ahead of us as best as I can and.
And perhaps the best way to do this is to describe the opportunity set in terms of serviceable available market or Sams, which in this case refers to the size of the opportunities immediately available to us as a result of this deal with Walmart and the total addressable markets or cans, which refers to the size of the opportunities that exist for <unk> beyond the scope of this deal as a rig.
<unk> of this new use case.
First I wanted to touch on the Sam and the Tam for the new use case of our platform capabilities.
As Charles mentioned, our deal with Walmart is structured so that their payment of $5 8 million in the second year is more than twice as large as the payment in the first year of the deal.
It is important to note that even at the end of year. Two there are still multiples of upside remaining before we reach full penetration at Walmart.
Hence the Sam is represented by full penetration of this use case at Walmart.
Also at multiple multiples higher than the $5 8 million payable to Denmark in year two of the deal.
Moving now to the Tam of this new use case, while Walmart is the largest retailer in the U S and the world.
We signed with <unk> represents only single digit percentages of the total global opportunity for this expanded use of our platform capabilities and hence the Sam mentioned above which again is multiples of $5 $8 million is only single digit percentages of the Tam of this new use case of our platform capabilities.
For now of course, our singular focus is delivering for Walmart. It is a top priority across our company at.
At the same time, it's also important to note that while not a near term focus the opportunity to expand its use of our platform is real and it is meaningful with an annual recurring revenue or <unk>.
Opportunity well into the nine figures.
Beyond the opportunity for increased platform revenue. This deal also provides expanded product opportunities.
For the last few quarters, we've been discussing a new <unk> product that will benefit from a top down driver of product Digitization demand.
Our new partnership with Walmart should act as a powerpoint curve for that demand.
As a result of this deal with Walmart the Sam of our soon to be launched product is large it's large enough to take us to profitability all of its own I'd.
I'd like the relationship between the salmon the Tam on the platform side some of our new product launches also single digit percentages of its Tim.
Measured in IRR this new products Tam is larger than the platform opportunity.
Even considering the immediate and longer term.
Longer term opportunities presented by the Sams in terms of both our platform and our soon to be launched product. We think the most exciting part of today's announcement is how much closer we have gone to a cutting edge technology leader.
Walmart processes are mind boggling number of products across multiple touch points every day. It is laser focused on using technology to improve all aspects of its operations.
We're a product Digitization company laser focused on digitizing the world's products to enable true digital transformation.
Our goal with this expanded partnership is quite simple continue.
Continue to win Walmart's faith in our partnership everyday because our future together will have a profound impact on the retail industry and beyond.
Walmart is a great company doing innovative things and we're honored to be partners in their product Digitization digital transformation journey rest assured we're just isn't patient to talk about what exactly those innovative things or as you and the world at large are to hear about them.
So we can say more in a very public way I ask you to respect our commitment to customer confidentiality, we take it very seriously.
Moving on from the Walmart News Q3 also saw us make progress with edge micro cycle, some visible somewhat but all of which is significant.
Starting with what was visible a few weeks ago, we released the topline results of the Canadian circular plastic task force pilot.
Which yet again confirm that digital digital Macrocycle was exceedingly effective in improving the accuracy of recycling sortation and provides an ability to sort material that current optical sorting technology simply cannot.
Not only are the results from the trial incredibly high with 99% accuracy. They were also consistent with similar tests recently performed.
I highlight this because this consistency and performance regardless of the material form factor type of commingled ways geography, or stakeholder group proves repeatability. This third tested <unk> macrocycle shows the exact same accuracy rates as the prior two.
There should be zero doubt as to the real step change value we can provide.
For those of you unfamiliar with the CPT they aim to drive projects to improve plastic packaging recycling with the evolve.
Within the evolving extended producer responsibility landscape in Quebec, and Canada more broadly.
Their focus in working with US is on improving the recovery rates of flexible plastic packaging because today's current sortation technology cannot do.
Distinguished between mono material recyclable packaging and multi material structures lowering overall be able quality.
We're energized by the opportunity to support CPT to execute against their vision for more effective recycling in Canada.
Beyond Canada, we were discussing how did your macrocycle can be a game changer with multiple stakeholders in other geographies and interest is growing we are prioritizing opportunities, where there is real urgency and commitment because there truly is no time to waste.
I'm borrowing the rallying cry of no time to waste from the business coalition for a global plastic Treaty a group of 800.
80, plus companies, including <unk> that launched in Q3 and is committed to supporting the development of an ambitious effective and legally binding UN global treaty and plastic pollution.
One is it can be any organizations. The Ellen Macarthur Foundation recently published document that shows that the implementation of high quality recycling wouldn't just have a large impact on carbon emissions reductions, but that the carbon emissions reduction can be achieved at a negative cost.
No time to waste indeed.
<unk> is committed to being part of the solution.
Looking forward a bit at the end of this month the European Commission. The main EU regulatory authority will publish its proposal to revise the rules for packaging and packaging waste for the European market.
They wish to upgrade the 1994 rules by tackling the growing production of packaging waste.
The low level of packaging circularity.
We expect the commission to unveil several measures to achieve these objectives, including mandatory recyclability of packaging and recycled content targets, new labor, new labeling requirements and greener public procurement.
As many of you know did you mark is uniquely positioned to support stakeholders in achieving these objectives. We look forward to the Commission's proposal at the end of the month and post release, we are prepared to educate policymakers and other key stakeholders about our technology, including brands and retailers, who we can support so they are better prepared to meet the forthcoming requirements.
For those interested the revision of the packaging of packaging waste directed will be published on the commissions website and discussed in our press conference and press release on November 30th.
Before we open up the call to questions I want to recognize a big milestone of the work that we began six quarters ago. As we took the time to question every assumption and come up with the right answers and in doing so transformed our company in many ways big and small.
In early Q3, we launched a refreshed website, reflecting not just our new work, but also we're doing a lot of new content that is a result of our transformation for those of you who haven't visited our website recently I encourage you to do so.
There was so much going on at our company it is difficult to add difficult to adequately.
It could be all of it on.
These quarterly calls.
Speaking now to my teammates whose hard inspired work over these past six quarters has gone to us gotten us to where we are now but will only continue to take us to new heights.
You all know our thematic goal for this quarter, it's time, let's do this.
Operator, we will now open the call for questions.
Thank you very much we will now begin the question and answer session to ask a question you May Press Star and then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the star keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star and then two.
At this time, we will pause momentarily to assemble the roster.
The first question comes from Matt <unk> from PCB Advisory. Please proceed with your question Matt.
Hi, Riley congrats on to you and the team on the overall progress in the Walmart deal in the quarter.
A lot is being made about digital twins strategy.
<unk> those two need to be digitized in order to reach true digital transformation and the fact that Mckinsey and there was actually Gardner has now started talking about what they called the screen digital twins, which is what we do.
The fact that these these massive thought leaders are coming around and seeing things the way that we see it.
Helps drive clarity right. So we don't need to spend and we're still early evening and they're driving clarity right, but as.
As the analyst pick up this term more and more and start talking about the world. The way that we see it we don't need to spend the first 20 minutes of our conversation with a customer or prospect talking about why did exactly what we do we can say where the leading digital twin company, let's talk about our products. So it's it's a wonderful unlock.
And it's a wonderful validation of what the teams down here I was just excited to see it is exciting to see it.
Great I appreciate the the explanation I'll jump back into the queue.
Awesome. Thanks.
And thanks for the kind words that are getting too.
The next question comes from Martin, etc. Private congested that please proceed with your question Martin.
Congratulations on the Walmart.
Alright.
Alright did you call equal cat alone can be $100 million <unk>.
<unk>.
Nine figures.
I'm sorry.
I'm, having a hard time hearing you.
Typically you think Walmart alone.
Nine figures $100 million a year in Avenue.
What we said Sam.
At $5.8 million, which is the second year of the Walmart contract. There is still multiples left of before each full penetration of Walmart. So we haven't defined exactly what that means but there is upside from the $5 Hs from the Walmart deal.
But then we also known.
<unk>.
I'm sorry.
Get my head around $100 million.
So the total addressable market. So so we are we are licensing R platform to Walmart for undisclosed use case.
The that same use case outside of Walmart, that's what we were talking about it could be the ninth figures.
With one more directly.
Uhm.
Last question, if you don't mind.
Okay cloth.
Discussion about taking their company private [noise].
No.
No.
Excellent.
Alright, I look forward to writing, which I'll have to check with you.
Okay. Thank you. The next question comes from <unk> from calling to proceed with your question.
Hey, Riley so congratulations on the deal I guess this is.
The.
Application that you talked about sort of having to have the impetus from the other party.
To get done and so maybe you could you could confirm that.
Yeah. So we've been talking about a top down driver product digitization.
<unk> is the ultimate timing of the release of that product is outside of our control and hope. He said today is that the deal we signed with mom is a very powerful anchor and the launch of that new product.
Gotcha, and then I just wanted to understand the particular, a little bit and you have talked about this in general terms previously so there is an application here.
Walmart is going.
Kind of licensure platform for there is gonna be and if it is for.
Their supply chain partners to utilize digit Mark bar code in order to facilitate.
Walmart development of that.
Capability.
There may be other Walmart type customers for that application and they may have the cooperation of their supply chains that would then need two adopted him mark barcode as well and that constitutes the.
Entire.
Tam available.
Jeff.
Understand why you're asking I really don't want to talk about this I mean this is this is as we said we take customer confidential confidentiality very seriously, but let me try and maybe it's.
Maybe try another way.
Like we have assigned to deal with the Walmart for the access to our platform.
Okay that is a daily announced today there are other people in the world who could benefit from this use case outside of the Walmart.
So that's the same in the <unk> on the platform side, we are about to launch a product.
Which which.
Will benefit from a top down driver a product digitization.
And this deal that we sign with Walmart is that powerful anchor and that is all I'm comfortable saying this all I really know that's it right.
That's great.
But important I think the immediate opportunity here is even in the second year of this contract we are not fully penetrated at Walmart and understand the new product that you will launch as a <unk>.
<unk>, an undisclosed tan, but we were trying to give some ballpark figures, which is the the the the immediately addressable opportunity for the new product by itself is enough to take us a profitability of the company.
Yeah I understand.
Right.
And then I have two quick other questions for yet around some things going on with G. S. One they've got this.
This new global location numbers sounds like it's something that would be very positive for everything applications as.
As well as the programme Sunrise 2027 to to make sure that <unk> systems at retail can handle two D. Barcode just touch on those for a night.
Yes first of all the second thing you are talking about is digital ink, which everything was Ah.
Big part of writing that standard.
So it was something we welcome and in General you know, we're big fans of G. S. One.
But G. S. One allows is for the global industry to to trade with each other.
And so the easier that is the more standards that are built so that.
The supply chain can work.
We're getting the benefit is a product Digitization company. So we're big fans of everything that had been just one does.
Specifically the last thing you're referencing this 2000 to 2007 Sunrise.
Standard called digital link and that's something that everything actually was.
One of the big.
But it was heavily involved in crafting that standard.
Great. Thank you.
[noise]. Thank you ladies and gentlemen, just another reminder, if you'd like to ask a question Keith <unk>.
The next question comes from <unk> from <unk>. Please proceed with your question.
Hey, guys. This is Daniel on protect Sammy.
Yeah, very exciting hear about what my opinion or just interested.
On the first and second year, maybe I missed understanding when easier fall I assume.
Fiscal year fiscal year, 2023, 50, or you're trying to make four are we talking here starting now here from two three what do we mean my first and second year.
Yes, it's starting as a Q3, so it's a term of the contract. The first year of the contract runs from Q3 Q2, and then and then the following year the same time period.
Okay, Great that's helpful and then.
On everything just looking at the numbers and sequentially hearing here every.
Every year excuse me, thanks down correctly is everything running around.
3 million.
Is that correct and then second how how is that everything integration going and how is that in terms of meeting expectations.
Yeah, so ill and on the second.
Turn it over to Charles for the first part.
The integrations great Denigration is complete we had internal target, we're calling day alpha which is.
Each functional group by functional group went through at the close of the acquisition and said what is that list of things that we need to do to be operating as one company.
And we achieved in Q3 I was probably the highlight I should've included my transcript.
But the.
We set out a goal I said something internally.
When we announced the acquisition.
Myself and some of the.
Digit Mark leadership team or over in London, and I said my goal is it a year from now nobody will remember what the name was under business card a year ago.
And it's we're <unk>, we're one company so the immigration is.
It's in the rearview mirror and it's going great and Charles you wanted to talk about I think.
Maybe you were talking about subscribed to talk with the 1.3 number you're talking about yeah. So intentionally not breaking that up because we're selling to combine product though.
So you can kind of do some back in math to say, what it might be but we're selling to combine products. So there's no way to really allocate that out. So we're not reporting individual everything revenue in bookings numbers and one thing I keep in mind as you are trying to do that math as you can imagine everything had.
Non U S dollar exposure and so you're looking you know what what's happened to the dollar versus every other currency strengthened since the beginning of the year. So that's been a headwind to that number as well.
Alright. Thanks, that's all I had thanks for answering my questions.
Yep.
Thank you.
I'm Christian and I'm sure. This could take a question and answer session and I'd like to turn the conference over 290 Mccormick for Cancun remarks, Thank you Sir.
Well, thank you cardio and thank you everybody for dialing in and we look forward to speaking with you again soon.
Have a great rest of your day bye.
Thank you. The conference has now completed thank you for attending today's presentation and you may now disconnect your lines.
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