Q4 2022 Digimarc Corp Earnings Call
Speaker 1: I.
Speaker 1: .
Speaker 2: Greetings and welcome to the Digimark 4th Quarter and 5th School Year 2022 earnings conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder that conference is being recorded, it is now my pleasure to introduce your host.
Speaker 2: Joel Meyer, Chief and Legal Officer. Thank you, Joel. You may begin. Thank you. Welcome to our Q4 conference call. Riley McCormick, our CEO , and Charles Beck, our CFO , are with me on the call. On the call today, we will provide a business update and discuss Q4 and fiscal 2022 financial results. This will be followed by a question and answer forum. We have posted our prepared remarks in the investor relations section of our website and we'll archive this webcast there.
Speaker 2: 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. Riley will now provide a business update. Thank you, Joel, and good afternoon, everyone. 2022 is a transformative year for our company. In a bit, Charles will review the financial highlights from the year. I want to spend time on the strategic highlights and how they positioned us in 2023 and beyond.
Speaker 2: As you all know, we generate revenue through two primary markets, government and commercial. On the government side, we re-signed our contract with the Consortium of the World's Central Banks two years before Expre, extending it out through the end of the decade. We take great pride in our work to deter global currency counterfeiting and are excited to continue our work with our long-standing and deeply valued customers, the central banks. Moreover, this program is a wonderful testament to the power of our technology, our scalability and our trustworthiness as a partner, not to mention our ability to build and support a massive, mission-critical, multinational, and global economy.
Speaker 2: multi-stakeholder system, similar to what we are doing in recycling. On the commercial side, we closed down our acquisition of everything, launched our first products, announced our first major value-added reseller, VAR, repeatedly and publicly proved our ability to make a real impact on the global plastic problem, and signed a multi-year deal with Walmart for an exciting new use case, further strengthening our relationship with the world's largest retailer. We have combined our digital watermarking and product cloud capabilities to form the DigiMark Illuminate platform, and on top of that platform have built four products, DigiMark Engage, DigiMark Validate, DigiMark Recycle, and DigiMark Retail Experience. We also continue to progress product candidates along the rigorous process that all must endure to become launch products.
Speaker 2: including intense market research to ensure they address large and growing problems, and that illuminates functionality upon which all of our products are built, provide significant technological differentiation. We prioritize product candidates that have forcing functions, network effects, or other powerful drivers of adoption. We have multiple promising product candidates we are currently progressing. Our goal is to digitize the world's products. To accomplish this, we must be easy to begin doing business with and excellent at guiding customers along their DigiMark journey. These simple truths drive everything we do. On the channel sales side, by licensing DigiMark Illuminate to a growing number of customers, we have a number of
Speaker 2: This is a very interesting, much-path to solve the problems they want to solve tomorrow.
Speaker 2: Moreover, because our products are accretive, which means that the standalone value they provide is increased by the adoption of additional DigiMark products, this frictionless path forward not just solves new problems, it compounds returns from all products, existing and new.
Speaker 2: We are building the product digitization market one product in one bar at a time, solving discrete problems while watching with growing excitement as visionary companies and industry observers begin to understand that by adopting multiple products built on a single platform, our customers can solve for today's and tomorrow's discrete problems while positioning themselves to finally achieve true digital transformation as their products are no longer stranded in the analog world. This is what we mean by being used to begin doing business with an axonic ID and color.
Speaker 2: the engage customer, they are looking to dramatically increase their adoption of this product. While they know they can get lower pricing from companies that can provide some of the consumer engagement functionality we are currently providing them, it isn't just our superior functionality that is keeping them moving forward on their digital market journey.
Speaker 2: It's their realization that their journey will include Digimark recycled and potentially another Digimark product in the not too distant future. Having all their products on the same platform will provide them a creative value that notes stitching together point solutions if they were even available would be able to replicate. This is the power of what we built in 2022. This is what gives us excitement for 2023 and beyond.
Speaker 2: Looking ahead, I want to provide an update on two of our products. The two I refer to as our top-down drivers of product visualization because of their ability to quickly advance the market we are building. The first is retail experience, which we recently soft-washed about which more is available on our website. While we are excited for a broader launch, it is in our best interest to work with the industry on this products rollout.
Speaker 2: The potential downside of top-down drivers of product digitization is that the very fact they are top-down means you don't always control all aspects of that product's launch. The upside, of course, is that there are top-down drivers encouraging adoption. I would note that a lack of broad publicity about this launch does not mean that there is not ongoing activity, nor real intent for interested parties, to drive adoption to modernize the retail experience. An experience where watermarks have moved from nice to have to need to have.
Speaker 2: As David and I are last call, the serviceable addressable market for retail experience is enough to take us well into profitability by itself. The second is recycle. While the same top-down driver, given take that applies to retail experience applies here as well, the two big differences with recycle are we've been actively advancing recycle from a seer and we are active on multiple continents and with multiple important stakeholders. We believe the per country tan for digital market cycle as well into the eight figures and plan to soon publish recycle pricing on our website to provide requested transparency to multiple important stakeholders.
Speaker 2: Our activity in two countries, France and Canada, is publicly known. A few weeks ago, the industry gathered in Purdue, France, to learn more about the opportunity to make France the European pilot market for DigiMarker Cycle. A large CPG announced it is public gathering, they are committed to being part of this pilot market at scale, and we are in discussions with multiple other brands and retailers about joining them. The group has had aggressive targets for both the scope and timing of initial adoption, and we stand by ready to assist them in their quest to make a real impact on plastics recycling.
Speaker 2: We are all aware of the world is watching. Stay tuned. Moving to Canada, in Q4, we announced the results of our work with the circular plastic task force. What I have found most impressive about this group's efforts is that they are proving how quickly a small, nimble, dedicated, and motivated group can move to make a real difference to a large and growing problem, and our wonderful partnership with them continues to deepen. Here again, we expect to have more to say soon. Our work in Canada is also informing our work in other countries that are further behind both France and Canada, but we hope to apply the learning we are getting in Canada to close the time and get. Before I turn the call over to Charles, I want to talk about our path to profitability. We know that to deliver upon the immense value inherent in what we are building, we need to build a financially sustainable business that can deliver what we fully expect to be able to deliver.
Speaker 2: This includes making sure we are always investing with great responsibility across all areas of our business. We recently made the very difficult decision to streamline certain areas and reorganize in others, and is so doing part of ways with some wonderful people and talented teammates. This action was neither a reflection of our prospects or the performance of any impact you made. Instead, it was a reflection of our knowing that in order to change the world, we must have a durable business. The actions we recently took not only have a big impact in reducing our current cash burn, but importantly take us a big step forward on our path to profitability, something that based on the size of the markets immediately ahead of us, coupled with the world-class contribution margins we enjoy, is squarely in both our focus and line of sight.
Speaker 2: I will now turn the call over to Charles to discuss our financial results. Thank you Riley and hello everyone. As we reflect back on 2022, there were a number of strategically important accomplishments to note as Riley just highlighted and there were also some important financial developments during the year I want to highlight before I dive into Q4 numbers. First, we deliver 85% year-over-year growth in first-year commercial bookings with bookings of 19.1 million in 2022. As a reminder, the commercial market is our largest area of focus given the enormous opportunities we are uniquely positioned to address.
Speaker 2: If you exclude our piracy intelligence product, which we have now completely sunset, our commercial looking growth was even higher at 160% the over year. Second, we delivered 32% growth in subscription revenue year over year, with the subscription revenue of 15.2 million in 2022. For the first time in a decade, subscription revenue accounted for over half of our total revenue, which is notable given the sale of our software subscription products.
Speaker 2: not only our most important product focus, but also our most profitable. We earn roughly 80% incremental margins on our software products right now with the potential to increase that to more than 90% at scale. If you exclude piracy intelligence, our subscription revenue growth was even higher at 77%. Third, while service revenue was flat year over year at 15 million, we expect service revenue to be higher in 2023.
Speaker 2: As a reminder, the majority of our service revenue comes from software development services we provide to the central banks. With the early extension of our contract with the central banks, which now runs through the end of 2029, we expect services revenue from that contract, which was 12.9 million in 2022, to be up over 10% in 2023. Now as promised, I'll dive deeper into our Q4 results. First year commercial bookings were 10 million during the fourth quarter compared to 2.6 million in Q4 last year. Bookings in Q4 last year included 1.3 million from Piracy Intelligence.
Speaker 2: As I referenced earlier, our piracy intelligence product has now been completely sunset, so there will be no future bookings or revenues. Excluding piracy intelligence, first-year commercial bookings increased 8.7 million or 680%. First-year commercial bookings in Q4 included the remaining 7.3 million of minimum fees due from the new Walmart contract, resigning Q3, as during Q4, these fees became non-cancellable and payable within the next 12 months. Total revenue for the quarter was 7.2 million and an increase of 100,000 or 1% from 7.1 million in Q4 last year. Subscription revenue, which represented 57% of total revenue in Q4, grew 13% in the quarter from 3.6 million to 4.1 million.
Speaker 2: There are multiple factors offsetting one another that impact the overall positive trend in subscription revenue. Adding the revenue with the impact of new deals signed during 2022, including the new Walmart contract in Q3, and the addition of subscription revenue from the Everything acquisition. These additions were offset by 1.6 million of subscription revenue from Piracy Intelligence recognized in Q4 last year, which included the 1 million dollar sale of non-corp patents, versus there being no revenue in Q4 this year.
Speaker 2: Excluding high-resue intelligence, the transcription revenue increased 2.1 million or 105%. Service revenue was 3.1 million in the quarter compared to 3.5 million in Q4 last year and was higher than our internal forecasts. The year-over-year decline is due to recognition of significant project work last year related to Holy Grail 2.0 while services with the central banks will marginally hire a year-of-year. As a reminder to those modeling of business, our central bank business tends to be seasonal, and nuts for lots of years, our Q4 service revenue has been down sequentially from Q3.
Speaker 2: The decrease in margin reflects 1.1 million or 15 percentage points of amortization expense recorded on acquired and tangible assets Recognized in the acquisition accounting for everything excluding amortization Subscription margins were 77% and service margins were 56% Non-gap gross profit margin which excludes amortization expense as well as stock-based compensation expense was 72% for the colder order compared to 74% in Q4 last year. This slight decrease in gross margin was driven by lower subscription gross margins year over year which in turn was largely related to product mix as legacy legacy everything subscription business carried a lower gross margin than the legacy the demand subscription business.
Speaker 2: As we work to combine these two amazing technologies into one seamless platform, we have identified ways to improve our product margins and expect the combination of cost-outs and revenue growth to drive our subscription margins north of 80% in 2023, higher than they were pre-acquisition. Operating expenses for the quarter were $17.1 million compared to $13.2 million in Q4 last year. The increase reflects $3.1 million of operating expenses from everything post-acquisition. Excluding the impact of everything, operating expenses were $900,000 higher, which included $1.2 million of higher compensation costs for annual compensation adjustments and higher headcount, of which $200,000 was non-cash stock compensation expense. Additionally, we recorded $300,000 in non-cash lease impairment charges.
Speaker 2: The higher compensation costs and lease impairment charges were partially offset by lower other expenses. The lease impairment charges related to adjusting our assumptions regarding the timing of subleasing our prior corporate office in Oregon, as well as our decision to abandon our office lease in London. non-GAAP operating expenses for the quarter were $14.3 million compared to $10.3 million in Q4 last year.
Speaker 2: The increase of 1 to 2.6 million of non-gap operating expenses from everything post acquisition. Excluding the impact of everything, non-gap operating expenses were 1.3 million higher year of year, which included 1 million higher cash compensation costs.
Speaker 2: only continues to grow. These reductions were the right thing to do to optimize the business for long-term sustainable success.
Speaker 2: The plan involved a reduction in our workforce of approximately 17%. We estimate the plan will result in one-time cash charges of approximately 1.5 million and non-cash charges of approximately 600,000 for accelerated stock compensation expense. We expect that most of these charges will be incurred and the plan will be substantially complete.
Speaker 2: Offsetting some of these savings though is the impact of annual compensation adjustments for employees and generally higher prices for third-party products and services due to inflationary pressures. Net loss per comment share for the quarter was $0.62 versus $0.50 in Q4 last year.
Speaker 2: Non-gapment loss per comment share, which excludes non-cash and non-occurring items, was 41 cents versus 30 cents in key for last year. We ended the year with $52.5 million in cash and investments.
Speaker 2: We used 3.8 million of cash and investments during the quarter compared to 10.9 million a queue for last year. During queue four we opportunistically raised 4.7 million of net proceeds under our ATHLE market program to bolster the value cheat. We sold 222,000 shares at an average price of $22.42.
Speaker 2: The ATM program has 1.9 million available for future sales, although we have no plans to sell any additional stock under the ATM program in Q1 as we assess the opportunities ahead of us. Excluding the net proceeds from the ATM cash usage would have been 8.5 million.
Speaker 2: For further discussion of our financial results and with some prospects for business, please see our form 10K that will be filed with the SEC. I will now turn the call back over to Riley for final remarks. Thanks, Joes.
Speaker 2: 2022 saw a set up the foundation for the years ahead and we are excited to continue to build upon that foundation in 2023 and beyond. We are seeing momentum across all areas of our business and our heart at work continues to increase that momentum as we create a market where we are uniquely positioned to lead for years to come. A market that at scale has the opportunity to be as large if not larger.
Speaker 2: than the other legs of the digital transformation stool. There are trillions of items produced per year, and our goal is to sell multiple DigiMark products into each of them, adding exponentially accretive value as we digitize the world's products. As an operator, we will now open the call up for questions.
Speaker 3: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participant using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions.
Speaker 3: Riley, the question is, let me see, I can phrase it this way. Maybe you'll be able to help. Would you be surprised if we're into the second half of this year and there's still...
Speaker 2: this relative lack of publicity that you're alluding to.
Speaker 4: particularly in light of some of the restructuring actions you've announced. I'm wondering if there isn't still the difficulty of predicting when the timing around, when the product gets traction in the market.
Speaker 2: You done a recycle or retail experience? I'm sorry. The retail experience product. You know, Jim, the one thing you're saying, one of the wonderful things about top down drivers are top down drivers. Some of them, one of the downsides of that is we're not going to complete control.
Speaker 2: really retail experience. I'm sorry. The retail experience product. I don't, Jim, the one thing you're saying, one of the wonderful things about top down drivers are top down drivers. Some of the one of the downsides of that is, we're not in complete control.
Speaker 2: I wouldn't confuse publicity and a broader talk about, I wouldn't confuse that with activity or they're being a lack of activity or real intent. That's all I'm going to say. This is, I think we mentioned in our last call that the new contract we signed with Walmart is a powerful anchor for this product. I think it could be good on our website and look at this product you'll understand. And, um, um,
Speaker 4: So I'll just leave it that is in our best interest to work with the industry at the pace they want to go on all things including publicity but again I would not mistake publicity for activity. Does does the pace in which the retail industry is moving though? Does that have any relation just in light of some of the actions you're taking to ensure they can get the profitability sooner rather than later. I'm just wondering if there's any connection there may not be.
Speaker 2: Yeah, that is. Are you saying what is our was our head count reduction related to our belief in the inflection of our business?
Speaker 2: Are you saying what is our head count reduction related to our belief in the inflection of our business? It's hiding around it being uncertain.
Speaker 2: No. No, no. No. It was. I know, and I spoke Charles and I went out of our way to call that out. Got any Charles's phrase all it was we Never been as confident or increasing confidence and I said this is nothing to do with either the people impacted or or our beliefs and So no, they're not related
Speaker 4: Thanks for clarifying that. Just with respect to the recycle product, you can, I think, talk a little bit more freely about this. In your mind, is there a timeline as to when this large SAM begins to convert into revenue opportunities? Yeah, something along the lines of what you highlighted.
Speaker 2: Yeah, I mean, we, there's in France, we talked about there was a public meeting where a large CPG committed to getting going at scale and we're in conversations with other people. All right, we're still early in 2023, so I would be hopeful that that happens this year. And then same with Canada, I'd mention stay tuned shortly, there should be some days out.
Speaker 4: relatively shortly or Canada. Okay, that sound like you're expecting a decent amount of news flow over the balance of the year. Absolutely. Thank you.
Speaker 4: Okay, does sound like you're expecting a decent amount of news low over the balance of the year. Absolutely. Thank you. Thanks Jim.
Speaker 3: Thank you. Our next question is from Jeff Van Rie with Craig Hall and Capitol Group. Please proceed with your question. Hey, this is Daniel Hipsman on for Jeff and Rie. First question, news on the workforce reduction. What was the timing on that? As in was that in Q4 here or is that layering in Q1 just for thinking about whether or not that's already reflected in this quarter's numbers or how much of a quarter of that is reflected in this quarter's numbers?
Speaker 2: It happened mid-February, so we'll have a month and a half of kind of regular spend in Q1 before the action took place, and then we'll have about 1.5 million of cash costs in Q1 related to this event.
Speaker 5: Okay. And then on, so on that 7.4 million of annual cash savings, that's all in relation to that workforce reduction or are there other pieces and parts.
Speaker 5: That is all related to the workforce reduction. And then on the Walmart New Use Case that we were talking about last quarter, you talked here on the call about the soft launch of retail experience I didn't know if that was suggesting that that was what the Walmart New Use Case was. But just if you could update us on where we're at with Walmart and then what the current thinking is on when...
Speaker 5: We would hear about what that use case is.
Speaker 2: So on the ladder that's up to them, what do you mean by update you and where we are with Well, I don't understand the first part of your questions.
Speaker 5: I just mean in terms of rollout, in terms of usage at Walmart, in terms of when we might hear about what the use case is, just all of the above, anything that can be shared about that.
Speaker 2: Yeah, I'll just repeat what I said in the call, which is, you know, it's our best interest to work with the industry on this. So that's up to them. But again, that's important to make clear that just because you don't know about it doesn't mean there's an activity going on. I don't mean that. It's just being in general, right? I don't think. I'm.
Speaker 5: You know, any of our partners are necessarily messaging to Wall Street. They're taking care of their own business. So when Wall Street finds out about it, maybe at a very different time than when important other stakeholders find out about it. Okay, thanks for that. And then just last of all, on the service revenue in the year over year, the client in Holy Grail, just maybe talk us through that. What was driving that decline and maybe what are the current expectations for Holy Grail moving forward? I know.
Speaker 5: France being the pilot project there, but just any other thoughts on how we should think about that service revenue going into 23.
Speaker 2: Yeah, so France has nothing to do with Holy Grail. I mean, there's a lot of the same stakeholders involved, right? But Holy Grail, it was a phase three trial and we got service revenue as part of that. That's lumpy one-time service revenue. We're not going to, you heard Charles say, our focus is on subscription. That is where we're at.
Speaker 2: going to be an 80% gross margin next year with growth from there, which is incredible in terms of just versus the SaaS universe, right? So our focus is on subscriptions, but we provided along with some really small licensing revenue to Holy Grail for this pilot.
Speaker 2: that was Holy Grail was services work. So there was just the timing of that different phases, phase one, phase two. I don't mean for a couple years there's been Holy Grail services work, but our goal would not be to have a bunch of Holy Grail services where we want to sell DigiMark recycle licenses. That's the focus.
Speaker 2: what services work. So there was just the timing of that different phases, phase one, phase two. I don't mean for a couple of years, there's been Holy Grail Services work, but our goal would not be to have a bunch of Holy Grail Services work. We want to sell Digimark Recycle Licenses. That's the focus. Okay, thanks for taking my question.
Speaker 3: As a reminder, if you would like to ask a question, please press star one on your telephone The confirmation tone 1 to Kate, your line is in the question queue. Hey Riley, hey Charles, congrats on a strong year in 22. You introduced in your comments Riley about the value added reseller and I guess I just wanted to understand, do we think of that or should we think of that as a license at the individual product level?
Speaker 2: more they pay us. And there's two wonderful things, well, the three wonderful things about, I guess. The first is entirely scalable and high margin revenue, as our value-edited resellers are out, selling whatever products or services they built upon illuminate, that's them doing all that work, and as a new, need more capacity, they have a license more from us. So that's one.
Speaker 2: Secondly, it's digitizing more and more of the world's products using our technology. It's a win-win-win. It's a win for us. It's a win for the bars, and it's a win for the end customers. You know, there's cross-cell and upsell between that. We're building a lot of technology companies that are both platform and product that can get to channel conflicts. We're actually creating a triple win with the way we're going to market. And then, you know, the third thing is we are never going to have all the best ideas in the world.
Speaker 2: And so by letting value-added resellers make use of our platform to come up with other solves, it's wonderful. Got it. Okay. All right. I appreciate that. And then also I appreciated the comments.
Speaker 3: You know, because we're obviously excited about some of the, you know, potential new product candidates. So I appreciate the insight into the new product candidate process, if you will. I guess the question would be, are any of the new product candidates that you're kind of referencing top down?
Speaker 2: Drivers, would you consider those also top-down drivers of digital product digitalization or are they more? I don't want to use the term bull time, but I will because I can't think of anything else Yeah, you can say creative products maybe Yeah, there's a reason I here's a reality right and that we've had this conversation that I think that you know
Speaker 2: what we prioritize in the product candidate roadmap because those are really powerful, right? That having either a top down driver or a network effect or some other forcing function is an incredible tailwind to have to a product as opposed to your word bolt on. It's just another product. So absolutely, there is...
Speaker 2: Sounds good. And when the time is right, when we can talk about it, we can make sure we talk about it.
Speaker 3: Let me appreciate that. Thanks. Thanks, Matt. I'd like to hand the floor back over to Riley McCormack, for any closing comments.
Speaker 2: Well, thank you everybody. We appreciate your time. Have a great rest of your day.
Speaker 2: Well thank you everybody we appreciate your time have a great rest of your day.
Speaker 6: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Speaker 1: I.
Speaker 1: I going.
Speaker 1: I you.
Speaker 3: Greetings and welcome to the Digimark 4th Quarter and 5th School Year 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker 3: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joel Meyer, Chief and Legal Officer. Thank you, Joel. You may begin. Thank you. Welcome to our Q4 conference call. Riley McCormick, our CEO , and Charles Beck, our CFO , are with me on the call. On the call today, we will provide a business update and discuss Q4 and fiscal 2022 financial results. This will be followed by a question and answer forum. We have posted our prepared remarks in the investor relations section of our website.
Speaker 2: 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. Riley will now provide a business update. Thank you, Joel, and good afternoon, everyone. 2022 is a transformative year for our company. In a bit, Charles will review the financial highlights from me here. I want to spend time on the strategic highlights.
Speaker 2: and how they positioned us in 2023 and beyond. As you all know, we generate revenue through two primary markets, government and commercial. On the government side, we reside our contract with the consortium of the world's central banks two years before X-Berry, extending it out through the end of the decade. We take great pride in our work to deter global currency counterfeiting and are excited to continue our work with our longstanding and deeply valued customers to central banks. We're over. This program is a wonderful testament to the power of our technology.
Speaker 2: scalability, and our trustworthiness as a partner, not to mention our ability to build and support a massive mission-critical, multinational, and multi-stakeholder system similar to what we are doing in recycling. On the commercial side, we closed down our acquisition of everything, launched our first products, announced our first major value-added reseller, VAR,
Speaker 2: repeatedly and publicly proved our ability to make a real impact on the global plastic problem, and signed a multi-year deal with Walmart for an exciting new use case. Further strengthening our relationship with the world's largest retailer.
Speaker 2: We have combined our digital watermarking and product cloud capabilities to form the Digimark Deluminate platform. And on top of that platform have built four products. Digimark Engage, Digimark Validate, Digimark Recycle, and Digimark Retail Experience. We also continue to progress product candidates along the rigorous process that almost endure to become launch products.
Speaker 2: including intense market research to ensure they address large and growing problems and that illuminates functionality upon which all of our products are built provides significant technological differentiation. We prioritize product candidates that have forcing functions, network effects, or other powerful drivers of adoption.
Speaker 2: We have multiple promising product candidates we are currently progressing. Our goal is to digitize the world's products. To accomplish this, we must be easy to begin doing business with and ex-wine a guiding customers along their digital market journey. These simple truths drive everything we do.
Speaker 2: On the channel sales side, by licensing digital market illuminate to a growing number of bars, we not only gain quickly scalable and high margin revenues, as our bars go to market with their own products and services built upon our world-leading product digitization platform, we also increase the amount of items that are digitized using our technology. This creates an ever-increasing number of upsell and cross-sell opportunities for both
Speaker 2: to solve the problems they want us all tomorrow.
Speaker 2: Moreover, because our products are accretive, which means that the standalone value they provide is increased by the adoption of additional Digimark products. This fictionalist path forward not just solves new problems, but compounds returns from all products. It's existing and new.
Speaker 2: We are building the product digitization market one product in one bar at a time, solving discrete problems while watching with growing excitement as visionary companies and industry observers begin to understand that by adopting multiple products built on a single platform, our customers can solve for today's and tomorrow's discrete problems.
Speaker 2: while positioning themselves to finally achieve true digital transformation as their products are no longer stranded in the analog world. This is what we mean by being easy to begin doing business with and excellent at guiding customers along their DigiMart journey. This is why we are indifferent as to where our customers decide to begin their DigiMart journey.
Speaker 2: And this is how we'll digitize the world's products. And in so doing, build a new market we are uniquely positioned to lead, due to our one of a kind means of identifying an item, our digital watermark, and the world's most scalable product cloud.
Speaker 2: A perfect example of this is a comment recently made to us by one of the world's largest CPGs. A current engaged customer, they are looking to dramatically increase their adoption of this product.
Speaker 2: While they know they can get lower pricing from companies that can provide some of the consumer engagement functionality we are currently providing them, it isn't just our superior functionality that is keeping them moving forward on their digital market journey.
Speaker 2: It's their realization that their journey will include Digimark recycled and potentially another Digimark product in the not-too-distant future. Having all their products on the same platform will provide the lucrative value that no stitching together point solutions, if they were even available, would be able to replicate. This is the power of what we built in 2022. This is what gives us excitement for 2023 and beyond.
Speaker 2: Looking ahead, I want to provide an update on two of our products. The two I refer to as our top down drivers of product digitization because of their ability to quickly advance the market we are building.
Speaker 2: The first is Retail Experience, which we recently soft launched about which more is available on our website. While we are excited for a broader launch, it is in our best interest to work with the industry on this product's rollout.
Speaker 2: The potential downside of top-down drivers or product digitization is that the very fact they are top-down means you don't always control all aspects of that product's launch. The upside, of course, is that there are top-down drivers encouraging adoption. I would note that a lack of broad publicity about this launch does not mean that there is not ongoing activity.
Speaker 2: real intent from interested parties to drive adoption to modernize the retail experience, an experience where watermarks have moved from nice to have to need to have. As stated in our last call, the serviceable addressable market for retail experience is enough to take us well into profitability by itself. The second is recycle.
Speaker 2: While the same top-down driver, given take that retail experience applies here as well, the two big differences with the cycle are we've been actively advancing the cycle from a year, and we are active on multiple continents and with multiple important stakeholders.
Speaker 2: We believe the per-country tan for DigiMarker Cycle is well into the eight figures and planned to soon publish Recycle Pricing on our website to provide requested transparency to multiple important stakeholders. Our activity in two countries, for instance Canada, is publicly known. A few weeks ago the industry gathered in Pertue, France.
Speaker 2: to learn more about the opportunity to make France the European pilot market for Digimarc Recycle. A large CPG announced at this public gathering that they are committed to being part of this pilot market at scale, and we are in discussions with multiple other brands and retailers about joining them. The group has had aggressive targets for both the scope and timing of initial adoption, and we stand by ready to assist them in their quest to make a real impact on plastics recycling. We are all aware of the world is watching. Stay tuned. Moving to Canada, in Q4 we announced the results of...
Speaker 2: So we hope to apply the learning we are getting in Canada to close the time and get.
Speaker 2: Before I turn the call over to Charles, I want to talk about our path to profitability. We know that to deliver upon the immense value inherent in what we are building, we need to build a financially sustainable business that can deliver what we fully expect to be able to deliver. This includes making sure we are always investing with great responsibility across all areas of our business. We recently made the very difficult decision to streamline certain areas of our business.
Speaker 2: impact in reducing our current cash burn, but importantly take us a big step forward on our path to profitability. Something that based on the size of the markets immediately ahead of us, coupled with the world-class contribution margins we enjoy, is squarely in both our focus and line of sight. I will now turn the call over to Charles to discuss our financial results.
Speaker 2: Thank you, Riley, and hello, everyone. As we reflect back on 2022, there were a number of strategically important accomplishments to note, as Riley just highlighted, and there were also some important financial developments during the year I want to highlight before I dive into Q4 numbers. First, we deliver 85% year-to-year growth in first-year commercial bookings, with bookings of 19.1 million in 2022.
Speaker 2: As a reminder, the commercial market is our largest area of focus, given the enormous opportunities we are uniquely positioned to address. If you exclude our piracy intelligence product, which we have now completely sunset, our commercial looking growth was even higher at 160 percent year-to-year. Second, we delivered 32 percent growth in subscription revenue year-to-year, with the subscription revenue of 15.2 million in 2022. For the first time in a decade, subscription revenue accounted for over half of our total revenue.
Speaker 2: which is notable given the sale of our software subscription products is not only our most important product focus, but also our most profitable. We earn roughly 80% incremental margins on our software products right now with the potential to increase that to more than 90% at scale. If you exclude piracy intelligence, our subscription revenue growth was even higher at 77%. Third, while service revenue was flat year of the year at 15 million, we expect service revenue to be higher in 2023.
Speaker 2: As a reminder, the majority of our service revenue comes from software development services we provide to the central banks. With the early extension of our contract with the central banks, which now runs through the end of 2029, we expect services revenue from that contract, which was 12.9 million in 2022, to be up over 10% in 2023. Now, as promised, I'll dive deeper into our Q4 results.
Speaker 2: First year commercial bookings were 10 million during the fourth quarter compared to 2.6 million in Q4 last year. Bookings in Q4 last year included 1.3 million from piracy intelligence. As I referenced earlier, our piracy intelligence product has now been completely sunset, so there will be no future bookings or revenues. Excluding piracy intelligence, first year commercial bookings increased 8.7 million or 680%.
Speaker 2: First year commercial bookings in Q4 included the remaining $7.3 million of minimum fees due from the new Walmart contract, resigning Q3, as during Q4 these fees became non-cancelled and payable within the next 12 months. Total revenue for the quarter was $7.2 million and an increase of $100,000 or 1% from $7.1 million in Q4 last year. Subscription revenue, which represented 57% of total
Speaker 2: by 1.6 million of subscription revenue from Piracy Intelligence recognized in Q4 last year which included the 1 million dollar sale of non-corp patents.
Speaker 2: versus there being no revenue in Q4 this year. Excluding piracy intelligence, subscription revenue increased 2.1 million or 105%. Service revenue was 3.1 million in the quarter compared to 3.5 million in Q4 last year and was higher than our internal forecast. The year-over-year decline is due to recognition of significant project work last year related to Holy Grail.
Speaker 4: compared to 70% in Q4 last year.
Speaker 2: The decrease in margin reflects 1.1 million or 15 percentage points of amortization expense recorded on acquired and tangible assets recognized in the acquisition accounting for everything.
Excluding amortization, subscription margins were 77% and service margins were 56%. non-GAAP gross profit margin, which excludes amortization expense as well as stock-based compensation expense, was 72% for the quarter compared to 74% in Q4 last year. The slight decrease in gross margin was driven by lower subscription gross margins year over year.
which in turn was largely related to product mix. As legacy, everything subscription business carried a lower gross margin than the legacy did your March subscription business. As we work to combine these two amazing technologies into one seamless platform, we have identified ways to improve our product margins and expect the culmination of cost-outs and revenue growth.
to driver subscription margins north of 80% in 2023, higher than they were a pre-acquisition. Operating expenses for the quarter were 17.1 million compared to 13.2 million in Q4 last year. The increased reflects 3.1 million of operating expenses from everything post-acquisition. Excluding the impact of everything, operating expenses were 900,000 higher, which included 1.2 million of higher compensation costs
for annual compensation adjustments and higher headcount, of which 200,000 was non-cash stock compensation expense. Additionally, we recorded 300,000 in non-cash lease impairment charges. The higher compensation costs and lease impairment charges were partially offset by lower other expenses. The lease impairment charges related to adjusting our assumptions regarding the timing of sub-leasing our prior appropriate office in Oregon, as well as our decision to abandon our office lease in London. Non-gap operating expenses for the quarter were 14.3 million.
compared to 10.3 million in key four last year. The increase in flex 2.6 million of non-gap operating expenses from everything post acquisition. Excluding the impact of everything, non-gap operating expenses were 1.3 million higher year of year, which included 1 million higher cash compensation costs. On February 16th, we announced a restructuring plan focused on streamlining our operations, removing redundancies, and improving our operating margins. While our level of optimism we're regarding our future business prospects only continues to grow.
These reductions were the right thing to do to optimize the business for long-term sustainable success. The plan involved a reduction in our workforce of approximately 17%.
We estimate the plan will result in one-time cash charges of approximately 1.5 million and non-cash charges of approximately $600,000 for accelerated stock compensation expense. We expect that most of these charges will be incurred and the plan will be substantially complete in the first quarter. The plan should result in approximately $7.4 million in annual cash savings and approximately $700,000 in stock compensation expense.
We are also looking at other non-headcount related areas of the business where we can streamline our operations and reduce our costs. Offsetting some of these savings, though, is the impact of annual compensation adjustments for employees and generally higher prices for third-party products and services due to inflationary pressures.
NetLoss per Common Chair for the quota was 62 cents versus 50 cents in Q4 last year. Non-Gap NetLoss per Common Chair, which excludes non-cash and non-recurring items, was 41 cents versus 30 cents in Q4 last year.
We ended the year with $52.5 million in cash and investments. We used $3.8 million of cash and investments during the quarter compared to $10.9 million in Q4 last year. During Q4 we opportunistically raised $4.7 million of net proceeds under our ATHLE market program to bolster the value sheet. We sold 222,000 shares at an average price of $22.42 cents.
of our financial results and risks and prospects for business, please see our form 10K that will be filed with the SEC.
I will now turn the call back over to Riley for final remarks. Thanks Charles. 2022 set the foundation for the years ahead and we are excited to continue to build upon that foundation in 2023 and beyond. We are seeing momentum across all areas of our business.
and our heart at work continues to increase that momentum as we create a market where you're uniquely positioned to lead for years to come. A market that at scale has the opportunity to be as large, if not larger, than the other legs of the digital transformation stool.
There are trillions of items produced per year, and our goal is to sell multiple Digimark products into each of them, adding exponentially accretive value as we digitize the world's products. Operator, we'll now open the call-up for questions.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your hands set before pressing the star keys. One moment please while we pull for questions.
Thank you. Our first question is from Jim Richieudy with Needham and Company. Please proceed with your question. Hi, good afternoon. I'm wondering if you can elaborate on the recycle product comments that you made. Riley, the question, let me see if I can phrase it this way.
I may be, you'll be able to help. Would you be surprised if we're into the second half of this year and there's still this relative lack of publicity that you're alluding to? Yeah, particularly in light of some of the restructuring actions, you've announced. I'm wondering if there's still the difficulty of predicting when the timing around, when the product gets traction in the market. You tell me a recycle or retail experience? I'm sorry, the retail experience product.
I don't you know Jim The one that I gotta say one of the wonderful things about top-down drivers are top-down drivers So one of the downsides of that is if we're not going to complete control
I wouldn't confuse publicity and a broader talk about, I wouldn't confuse that with activity or they're being a lack of activity or real intent. That's all I'm going to say. I think we mentioned in our last call that that...
The new contract we signed with Walmart is a powerful anchor for this product. I think it'd be good to our website and look at this product you'll understand. So I'll just leave it there. It's in our best interest to work with the industry at the.
They want to go on all things, including publicity. But again, I would not mistake publicity for activity. Does the pace in which the retail industry moving now? Does that have any relation just in light of some of the actions you're taking to ensure that you can get the profitability sooner rather than later? I'm wondering if there's any connection. There may not be. Are you saying what is our head count reduction related to our belief in the inflection of our business? I've been tining around it's being uncertain.
No, no, no, no, I mean, Charles and I went out of our way to call that out. Okay. Guy and Charles was phrase all it was, you know, never been as confident or increasing confidence and I said this is nothing to do with either the people impacted or beliefs and anything. So no, they're not really good. Thanks for clarifying that and then just with respect to the recycle, um, Cigemark recycle product, is there, is there any, you can, I think,
talk a little bit more freely about this. Is there in your mind is there a timeline as to when this large SAM begins to convert into revenue opportunities? Yeah something on the lines of what you highlighted. Yeah I mean we there's in France we talked about there was a public meeting where a large CPG committed to getting going at scale and we're in conversations with other people.
We're still early in 2023, so I would be hopeful that that happens this year. And then same with Canada, I mentioned stay tuned shortly. There should be some news out relatively shortly in Canada. Okay. It does sound like you're expecting a decent amount of news flow over the balance of the year. babies centres I state we're at some age range at day board we come in range of 80 days hair
Absolutely. Thank you. Thanks Jim. Our next question is from Jeff Van Rie with Craig Hall and Capitol Group. Please proceed with your question. And this is Daniel Hipsman on for Jeff and Rie. First question, use on the workforce reduction. What was the timing on that as in was that in Q4 here or is that layering any Q1 just for thinking about whether or not that's already reflected in this quarter's numbers or how many?
So on that 7.4 million of annual cash savings, that's all in relation to that workforce reduction or are there other pieces and parts? That is all related to the workforce reduction. Okay.
And then on the Walmart New Use Case that we were talking about last quarter, you talked here on the call about the soft launch of retail experience. I don't know if that was suggesting that that was what the Walmart New Use Case was, but just if you could update us on where we're at with Walmart and then what the current thinking is on when.
We would hear about what that use case is. So I'm a ladder that's up to them. What do you mean by update you and where we are with Walmart? Well, I don't understand the first part of your question. I just mean in terms of rollout, in terms of usage at Walmart, in terms of when we might hear about what the use case is, just all of the above it, anything that can be shared about that. Yeah, I'll just repeat what I said in the call, which is, you know, it's our best interest to work with the industry on this. So it's up to them.
But again, it's important to make clear that just because you don't know about it doesn't mean there's an activity going, I don't know if it means that it's just being in general. I don't think any of our partners are necessarily messaging to Wall Street. They're taking care of their own business. When Wall Street finds out about it, maybe the very different time than when important other stakeholders find out about it.
Okay, thanks for that. And then just last of all, on the service revenue in the year over year, the client in Holy Grail, just maybe talk us through that. What was driving that decline and maybe what are the current expectations for Holy Grail moving forward? I know France being the pilot project there, but just any other thoughts on how we should think about that service revenue going into 23. Yeah, so France has nothing to do with Holy Grail. I mean, there's a lot of the same stakeholders involved.
But holy grail, it was a phase three trial. And we got service revenue as part of that. That's lumpy one time service revenue. We're not in that, you're a child, say, our focus is on subscription. That is where we're at going to be at 80% gross margin next year with growth from there, which is incredible in terms of just versus the SaaS universe. So our focus is on subscriptions. But what we provided along with some really small licensing revenue to holy grail for this pilot that was holy grail, was services work.
So there was just the timing of that different phases, phase one, phase two. I don't mean for a couple of years there's been Holy Grail Services work, but our goal would not be to have a bunch of Holy Grail Services work. We want to sell Digimark Recycle licenses. That's a focus. Okay. Thanks for taking my question.
of that different phases, phase one, phase two. I mean for a couple years there's been Holy Grail services work, but our goal would not be to have a bunch of Holy Grail services work. We want to sell DigiMark Recycle licenses, that's the focus. Okay, thanks for taking my question.
As a reminder, if you would like to ask a question, please press star one on your telephone The confirmation tone 1 to Kate, your line is in the question queue. Hey Riley, hey Charles, congrats on a strong year in 22. You introduced in your comments Riley about the value-added reseller and I just wanted to understand do we think of that or should we think of that as a license at the individual product level in terms of our platform level. Platform level. So did your Markle momentary, there's our platform, we're using that in two ways. We are building our own products on top of that. Those are the four products we talked about. We have other product candidates that we're working on. That's what we sell direct.
But we also believe, and I think I mentioned this in the call of GoMB2 calls ago, we also are licensing that platform to value added resellers to build their own products and services on top of it. And it's just like any other hyperscaler type model where the more capacity they use the more they pay us. And there's two wonderful things, well, the three wonderful things about it, I guess. The first is entirely scalable and high margin revenue, right? As our value added resellers are out, selling whatever products or services they built upon eliminate, that's them doing all that work and as a need more capacity they have a license more from us, so that's one. Secondly, it's digitizing more and more of the world's products using our technology. As a win, win, win, it's a win for us.
It's a win for the bars and it's a win for the end customers. There's cross sell and up sell between that. We're building a lot of technology companies that are both platform and product that can get to channel conflicts. We're actually creating a triple win with the way we're going to market. And then the third thing is we are never going to have all the best ideas in the world. And so by letting value added resellers make use of our platform to come up with other solves, it's wonderful. Got it. Okay. All right.
I appreciate that. And then also I appreciated the comments, you know, because we're obviously excited about some of the, you know, potential new product candidates. So I appreciate the insight into the new product candidate process, if you will. I guess the question would be, are any of the new product candidates that you're kind of referencing top-down drivers, or would you consider those also top-down drivers of digital product digitalization, or are they more, I don't want to use the term both on, but I will, because I can't think of anything else.
Yeah, you can say creative products maybe. Yeah, there's a reason. Here's the reality, right? We've had this conversation. I want to be careful what I say because there's still uncertainty. When there's uncertainty, I want to call it out. They're product candidates for a reason. Because we have not guaranteeing right now they're going to be Tom Products. If we knew they were going to be products, they would already be products. Right? So with that, Kaffee on said, absolutely, there's a reason why I talked about how we prioritize.
what we prioritize in the product candidate roadmap because those are really powerful, right? That having either a top down driver or a network effect or some other forcing function is an incredible tailwind to have to a product as opposed to your word bolt on. I was just another product. So absolutely there is...
You picked up on it, I think that's right. That's why I talked about how we prioritize them. So there are, there is a mix in our product and it pull both single products, you know, kind of dissolving discrete problems that help us digitize the world's products, one problem at a time. But there's also some top down forcing function network effect products in there. That's good. And when the time is right, when we can talk about it, we can make sure we talk about it.
That's why I talked about how we prioritize them. So there is a mix in our product and it will both single products, you know, kind of dissolving discrete problems that help us digitize the world's products, one problem at a time. But there's also some top down forcing function network effect products in there. That sounds good. And when the time is ripe, when we can talk about it, we can make sure we talk about them. Let me appreciate that.
Thanks. There are no further questions at this time. I'd like to hand the floor back over to Riley McCormick, for any closing comments. Thank you everybody. We appreciate your time. Have a great rest of your day. Thank you.