Q2 2023 Digimarc Corporation Earnings Call

During the quarter the sale of real nearest active safety business too man that was completed for net cash proceeds of $1.5 billion.

Before turning to the fourth fiscal quarter guidance I'll update you on global three G. Four G. Five G handset units and channel inventory.

We continue to estimate that calendar twenty-three handset units will be down at least a high single digit percentage relative to calendar twenty-two, reflecting the macroenvironment and a slower recovery in China.

This forecast contemplates growth enhancer tonight's going into the holiday season.

In Iot channel inventory remains elevated due to weaker demand driven by the broader macroeconomic conditions.

Since it remains difficult to predict the timing of a sustained recovery and customers remain cautious with butcher's as we continue to operate under the assumption that inventory that makes will be a factor through the end of the calendar year.

Turning the guidance for the fourth fiscal quarter.

We are forecasting revenues of $8.12819 billion, and non-GAAP EPS of $1.80 to $2.

And QTL, we estimate revenues of $1.15 billion to $1.35 billion in EBIT margin of 64% to 68%.

Driven by a slight sequential increase in global handset units.

In Kansas City, we expect revenues of $6 $97.5 billion in a beauty margins of 24% to 26%.

This forecast is consistent with our prior guidance of muted seasonality and Q city revenues, primarily due to the timing of voices is by a modem only handset customer.

On a sequential basis, we are forecasting Android handset revenues to be roughly flat with mid single digit decline in Iot and low double digit growth in automotive.

Lastly, we expect non-GAAP operating expenses to be approximately flat relative to the third quarter.

As we approach physical 24, Ah revenue growth will largely depend on macroeconomic environment global handset units in China recovery.

And the first fiscal quarter, we expect to drivers of sequential revenue growth cute.

Qtl's seasonality and handset launched by a modem only customer and.

In addition, we expect a sequential decline in Iot, an automotive revenues consistent with a seasonal trend we've seen in the last couple of years.

As you'll recall, we had previously communicated we would evaluate additional cost actions as the environment continues to evolve.

Until we see sustained signs of improving fundamentals are operating framework does not assume an immediate recovery.

Given our commitment to operating discipline, we will proactively implement additional cost actions in the first half of fiscal 24.

This will be incremental to the reductions we have successfully completed and physical twenty-three.

Despite these actions, we will preserve investments that our strategic priorities and position ourselves to be much stronger as the recovery from the broader industry begins to take hold.

In closing we remain focused on executing on our vision to bring connectivity high performance low bar computing and on devised generator to the edge.

Our guiding principles remain the same prioritize technology leadership accelerate diversification and drive earnings growth to create value for our stock holders.

This concludes our prepared remarks back to your Mary Sue.

Thank you cause operator, we're not ready for questions.

Q a question press Star then the number one.

Throw your question press Star too.

If you're using a speaker phone please pick up your handset before pressing the numbers.

One moment please for the first question.

The first question is from that Ramsey with television Cowan.

Thank you very much good afternoon, guys Ah Ah cash I guess for for my first question. You were you were kind enough to give us a little bit of color and your required prepared script now on on December and it went through a few things there pretty quickly so I wanted to.

Double click on a few maybe you could recap for US just trends you expect and handsets versus Iot an auto that you gave in in particular, you you've talked about some seasonality being better in the fourth calendar quarter in the handset market.

But that inventory Bill Byrne was still going to be part of the dynamics. So you could talk through that in a little bit more detail what kind of magnitude are you expecting for the industry and in the fourth quarter. What's built into your your estimates and is the inventory burn just an Android dynamic or do you think the the pretty purchases from Cupertino are still in effect in the December quarter.

Thanks.

Sure Matt. So there was a lot of them there I'll try doing bucket, let me divided into parts. So first starting with the market our forecast does assume sequential growth into the December quarter as we go into the holiday season.

From a financial perspective, consistent with historical ears, we typically do significant drivers of growth going into December from September 1st as QTL and we expect to see that growth is the market market grows as well and then second is a handset launch by a modem only go store off of the Bay's we have in September we.

Expect to see that growth as well so those would be the two significant growth drivers into the quarter.

From I O T. An automotive perspective, we we have if you look at the last couple of years, we've seen a trend of a slight decline in both areas quarter over quarter from September to December . So we just think this the same seasonality will play out not not something that goes beyond that it's just a normal timing that we've seen in the market in the past.

Maybe the last comment I would say is our forecast for September and December quarter does assume Ah no material revenues from Huawei as as you are aware, we have a four G license for shipping into Huawei, We do not have a five G license and we're not assuming any material revenue going forward.

So hopefully that covers all the different parts.

The next question is from semi <unk> with J P. Morgan.

Hi, Thanks for taking my question and I have a couple, but maybe I'll gosh, if we can start with.

The got into it.

You just had if I look back at some of the season.

And fries.

B C White green.

Instead of.

Plus two something somewhat of a higher number as well in the double digits, maybe if you can.

Give us a bit more ah loading themselves as you'd think about you said in your smartphone.

Recovery.

In terms of volumes Oh, you're thinking about it typical season.

Any of those.

Yeah. So so <unk>, maybe no additional comments to what I just said I think if you look at our history with the growth in the smartphone market, we see QTL grill with it and so we expect a similar game. This year and then I'd, probably say is similar to on the on the modem customer site is.

Well, we'd see something similar to what we've seen in the past so I think using using historical trend as a way to model of going forward is a reasonable way of doing good for those two factors.

Okay. Okay.

I mean, obviously the inventions balance sheet did come down a bit but how are you thinking about.

The opportunity here to sort of disco.

Okay.

The balance sheet or even from before.

Investors perspective.

Think about the risk.

Right down if the recovery is sluggish for a period of time, how how should we think about those a driver was given the inventory drawdown has continued.

Along with an expected duration.

Yeah, so somebody called fiercely our our analysis is reflected in our results. We we we think you real understand the drivers that got us to the industry the inventory balance the overall industry being weaker than with six months lead time, you're planning for a different market and and what we're comfortable with it.

Is that we have the inventory on the right parts there as long lifetime on it and there is demand for it so Ah our latest analysis on the topic is reflected in our results.

The next question is from like or work late with Canaccord Genuity, let's see is there a question.

Okay. Thanks to Cristiana I, just wanted to talk about the snapdragon for Jen to let it talked about.

How is the initial uptick in terms of androids demand from your customers looking at that and do you think given the supply demand.

Imbalance that you'll be able to know gain share in 2024, he moved downstream that Android.

I might thanks for the question. So let me just start with you know that there is enough dragging a forge into what we like about it is.

Is it <unk> I think the market needs to drive now the next wave of four G to five G. Migration just as an example show me just recently launched a red meat 12, five G smartphone yesterday in India and Ah ESP at 135 U S. Dollars. So we're very encouraged with now the ability to.

Create this four G. Five G migration I think there are a number of markets now that are the 0.5 G in developing economies and and as you pointed out and now we don't have supply constrained anymore at the mast here and our new product roadmap. We're encouraged about the ability to drive that four G to five G migraine.

<unk> add those price points.

Alright take just a quick follow up just on the Iot business.

Can you give us an update on it three segments hearing into segments.

Better than others in terms of the inventory bleed or the outlet provided.

Sure Mike. So this is a gosh I'll start on maybe Cristiana can add.

On top of it so in the short term they already business is seeing some of the same dynamics as you were saying come through with our peers from a demand side and what the impact that has on the inventory channeling dory.

When we saw the initial weakness it started with consumer but we did see it go across to other parts of I O D as well, especially within China.

But we're pretty happy with the results we had in the June quarter were.

Approximately 7% on revenue and and it it was really growth across industrial and consumer that drove that benefit difficult to go to.

Predict the timing of recovery in the inventory drawdown, we did say that it would be a factor through the end of the calendar year, but that's the framework for the very short on either decide.

Maybe the only thing I was gonna add Mike as we indicated Ah multiple times, there's a lot of things in the audio segment and there's some of those things that they have yet to materialize. I think you know we we talk about R. P. C space, which were excited about you know the new product we have been <unk>.

Eloping with our customer Cpus, we which do in the beginning of a of a virtual.

Reality were encouraged by now or their players entering the market, which will ignite the developer ecosystem and and I think lastly on on networking.

We like the when the Wifi seven design, we pipeline that could materialize in a new cycle into the future. So as as as we outlined there's a number of different thing to think that segment.

The next question.

And that's from the lineup Stacey Rascon with Bernstein research assist you with your questions.

This mask on your line is open for questions.

Perhaps you on mute.

Hello.

Sorry about that I wanted to ask about a chip gross margins.

They seemed reasonably strong in the corner, even with revenues down they they seemed like maybe they weren't quite up a bit sequentially. The guide seems pretty stable into September can you give us any feeling for for drivers all of them are just pricing masks and talk about some some additional cost dynamics and if there's anything in there on the on the cost of goods side, some of the dynamics era and how should.

We expect that to evolve and he just makes it drives you going forward are there other things that would you think of that.

Sure Stacey gosh, Yeah, we we did come in a little bit better than forecasted for the for the September quarter, and and it was really primarily driven by a mix of products.

In guiding approximately flat margins going into going into September from June and that's a reasonable way of forecasting our margins going forward as well. So we expect to be in the range as we go forward.

Thank you if I can ask you one more briefly.

Uhm pressure on you're talking a lot about AI and and how that's gonna contribute how does a I actually contribute to the mall or going for like <unk> are you anticipating it eventually drive an upgrade cycle or is it more content or is it you know asp's for the chips fall less than they would otherwise like how do how do we think about how that actually drive to the model almost as adoption happens.

Very good thanks for the question Stacy look I I think Ah one pack the answer to the question and first of all we're we're very confident in what we see happening at the edge own device I think there's a number of reasons AI is developing on devices are a little bit different in the cloud everything.

It's real time, a I I always on AI context Ah Ah.

Latency reliability personalization and I think that can apply to Ah products across all of our end markets.

When it will happen I you know we are going to announce a new setup products that they're snapdragon tech sammut that are all going to be Jenny I capable products that on phones on computing products on on on all of the other segments in Alto and Iot and we thank the monetization will happen.

Two ways right the easiest way to think about it is.

If our customers and our partners that are working with US we mentioned a few in the prepared remarks come up with a new use cases and you have now on a journey I capable of smartphones that changes the size of the phone market it could create an upgrade cycle.

In between five G. Six G and changes in shape size of the market I also improve the mix towards our product lines and ASB increases.

For you to do device Jenny I own device you needed different computing platform. That's why we have been doing with our N. P. U I think it's probably the unmatched by any of our peers and the ability to do high performance AI pervasive late and continuously at low power and we look those things.

Could create an inflection point is hard to predict the timing, but we we can see how it changes the mix and improve the ASB in our products.

Our next question comes from Rozema with Deutsche Bank. Please proceed with your question.

Hi, guys. Thanks May I ask a question just have one question one follow up on the December quarter Soft guide that you gave her car she talked about your modem only customer having it's typical seasonality in the fourth quarter calendar fourth quarter, what is a typical seasonality and or your expectations for the Android side of things in that quarter.

Yeah, so from an Android perspective, Ah, we expect the quarterly trying to be consistent with history. If you look at what typically happens for us in Android as we launch our new chips in the in the March quarter, and that's when the new premium Dear chip comes out and that's typically the stronger quarter for us so.

It's really driven by timing of product launches, but fundamentally when you look at our position with an Android even within 23, we've actually grown share of cell true from 22 to 23. So we continue to be in a very strong position and it's just the market dynamics, that's kind of driving the cyclicality.

In the business.

Thanks for that and I guess it was my follow up sticking with you a cash on the Opex side of things you've talked about macro still being uncertain and so you were gonna take actions in the first half of your physical 24.

The cost side of the equation could you give us any more color on that I assume it's largely on the opposite side you guys have been successful in hitting your five per cent reduction if that beating exiting this year versus last any sort of qualification you can provide on what are your expectations are for opex and that new cost cutting plan.

Sure. So let me let me give you the framework of all we're thinking about it and I don't have quantification at this point, but we we've on in twenty-three we exceeded the darn good reset and as we've said before will continue to look at additional reductions as as the environment. The walls. So given that what we're planning to do.

Who is proactively implement additional actions and forced half of 24 and the framework for it is we're going to preserve our strategic priorities, we're going to.

Reducing certain areas, but then also have the capability to invest in new technology, especially I and continue to invest in our diversification black.

So it it's it's it's really an effort to get down and restaurant portfolio right does is consistent with the priorities going forward for the company.

Our next questions from the line of Chris case out with Wolf Research. Please proceed with your question.

Yes. Thank you it as a first question if perhaps you could talk a bit about mix, where is your mix sitting as compared to where it was last year and you know obviously, the <unk> skewed higher during times of supply constraints and and now there's there's greater availability.

So so how is that affecting our margins are avenue in that as things go forward.

How do you expect that to change as well you know I guess there. There's you know some concern that mix shifts down to perhaps some some lower end of the portfolio as the five G cycle matures and and the emerging markets tend to become a bigger part of the five G. M X.

Yeah, Chris that's a gosh, if you look at them mixed change it truly happened through the year, where we expanded our position in the lower tiers, a bit and it's already reflected in the comments I made earlier to Stacy question on gross margin, so really annoying incremental comments to what I said said earlier.

As we look forward one of the key opportunities for US is really how do we expand the S. B is just continuing to see incremental demand across all tears for more capably deemed the chipset and two cristiana as earlier point would generate a V I, becoming so critical an edge of devices going forward it's going.

[noise] to drive an inflection point in terms of our presence there and our ability to expand our content.

That's helpful. Thank you just to follow up a question about a geographic Ah the revenue in particular to the handset business and we've been hearing about you know.

Perhaps greater macro concerns in China as compared to elsewhere in terms of Normalising, the business and getting the global handset market back to where where it. Once was is this mainly a situation where we need to see trying to come back and normalize or is is is more of a.

Global trend, what what what needs to improve in other words.

Get back to what used to be normal.

[noise], Yeah, I'd I'd say a couple of bars. So we've we've seen weakness across China and other emerging markets. Those are definitely the two areas in developed markets to Mark. It is largely held there is some smaller impact but not as much I think the opportunity is really across the board I think one is just from you know where all the place.

<unk> repressed meant great perspective, you could see that increase going forward driven by new technology cycles, but also within the emerging markets in China, you could see some normalization of return on demand as as things stabilized. So those would be the opportunities just to be clear in the guidance that we're giving at this.

Point, we're not including those and that would be upside to our plan.

Our next question is from the live Brett Simpson with research. Please proceed with your question.

Yeah. Thanks, very much Ah cash I had a near term my question on smartphones I mean some of your.

Smartphone peers are reporting better fundamentals near term I think immediate texts.

June quarterly were up six per cent in smartphones and they're talking about mid teens grow sequentially in September quarter, and I think card was also talk to buy quite a significant uplift in September .

And I know you said, there's a weakness elsewhere in Q C. T. But can you just need to be home and on the smartphone business and.

How can you reconcile with some of the peers and with a guide and what your guiding is it just really Apple and Huawei is going through a volatile patch four orders or is there something more structural you think at work and maybe second question for Cristiana Uhm you talked earlier this year I think it mobile will Congress actually that you.

We're assuming no Apple business and 2024, because you didn't have orders and and your orders. There has has anything changed with regards to Apple and how should we think about this relationship beyond countless twenty-three. Thank you.

Yeah Breaths I'll I'll start with your first question. If you let me break it down into Android and Apple in two parts within within Android.

Two comments to keep in mind first as we don't think there's any there's been any significant shift and shared between the players over the last last few months. However, what has what has happened is when you look at our total share of sell through for twenty-three relative to twenty-two.

As I mentioned earlier, we have actually gainshare with an Android. So we're going to have to have a very strong position and the god of the.

The sea seasonality across the quarters for Android is really a reflection of when devices are launched in which tiers, we blame which is the premium an idea, which the center around the holiday season horses midway through the years. So that's that's how I would think about the Android market on Apple as I've said before.

We expected muted seasonality in the fourth quarter due to the timing of chipset purchases.

We did see them by additional chipsets earlier in the year and so what we are for guessing now is expected demand expected shipments into the next quarter. So it's that really just speaks to dining again, rather than some fundamental trend as you know we expect to be a majority of their share in the new upcoming launch and so it's not.

Really a short question.

But to your second question for the iPhone that is launching this year, where we are going to support the modem, we're not making any updates to a primal plans for 2034.

Okay. Thank you guys.

Our next question is from the line of <unk> Bank of America assist you with your question.

Yes, hi.

Odom market, we spoke a lot about the headsets I have two questions related auto market was also week can you give an update on why it grew 13% or assist 16% Street expectations.

But this 13 per cent is also lower than what we've seen before so can you talk about the trains there.

I O T was in line with expectations, but it's still declining 24 per cent a year. So what is the trend over there.

And on the headset side I'm, just wondering if there was deterioration throughout the quarter or it was.

Improvement throughout the quarter kind of what was the intraquarter trend. Thanks.

And I'm, sorry E C T.

Understanding on on the handset side really largely in line with what we had expected so no no trend one way or the other auto and our actual skimming came in slightly below our expectations. However, if you see what we are guided for the upcoming quarter quarter over quarter growth, where guiding low double digit growth.

So it's just diming between the quarters, that's that's impacting it within Iot I'd say very consistent with comments earlier in the call. It's really the overall environment and and how it impacts demand an impact on inventory.

Is what's reflected in our numbers are very consistent with what some of our peers I've seen as well.

Uh-huh.

Okay. Just just clarification on something you said you said the December should be in line with normal seasonality I tried to look back at seasonality. It's inconsistent it's very hard to speak about normal what what how do you define normal seasonality for for the second.

If you break it down into parts I think you look at Cutie outgrowth, we've consistently seen QTL grill as a result of mixed up with devices and go to the market size.

So that'd be part one the second is we've seen the handset market grill, primarily due to the launch off flagship device my modem on any customer and so we would see that as well. So those are the two factors that would drive majority of our grilled into into the December quarter.

Alright, thank you.

Thank you.

Our last question is from the line of Timothy carry with you B S places here with your question.

Thanks, a lot I had two so I'm wondering if you can provide more color just on these channel you know headwinds you gave a 2 billion dollar number I think for December and then that came down to a billion or it was supposed to come down to a billion in March.

I'm supposed to have been gone by June you know obviously, it's not gone can you kind of quantify what the headwind is and you know maybe also talk is that component inventory at your customers still coming down or is that handsets cell in still being about the handset sell through and that I had a you know a second dumb question as well.

Yeah. So when we talk about channel inventory, we talk about total inventory across beyond us so its customers and channel both combined I mean, clearly as we have gone through the year the headwinds are being meaningfully higher than we'd expected going into the fiscal year.

So that is reflected in the updates that we're giving no no no fundamental change to our view off our share position and overall the market we've talked about as well. So it's just those factors running through our numbers. We don't have an updated estimate of how much the total limp.

That would be but it's it's it's the same factors that we've been talking about through the year, we've not change the total market size since the last call.

[noise] got it. Thanks, and then just last thing. So do you have any data on the refurbished market. It seems that it has gotten pretty large and maybe it's affecting the new Android market.

You know sort of what portion of the handset him. This year do you think is used or reverb could it be I mean, we've seen numbers in the 350 million unit range something like that so the market is flat to down but the market for new phones is really actually down quite a bit can you actually talk to that thanks.

Yeah. So the so we have the same data as you do on the refurbished phones. It has it has grown over the last couple of years, when we give the market. The global handset unit information, we're not talking about the refurbished phone, we're talking about a new phones and so it's already factored into the guidance weekend.

Thank you.

This concludes the question today's question and answer session. Mr amount do you have anything further to add before or during the call.

Thank you.

Like to thank all of our employees or customers or suppliers and partners.

I think the key messages where.

We we like our strategy continue to execute on our strategy. We're executing to plan I think we have one of the best product Roadmaps in our in our history. We we liked the design interaction and and of course I'm sure. It's an environment, where just focus on taking action on things that we can control and make sure we are.

We're prepared when the market rebounds less.

Last comment is we we see any way inflection point as I mentioned before on the edge from <unk> and what we like about it it for that to happen on device fundamentally you need a new computing engine.

We have we have C. P U G. P U but are you all you need something different which is the N. P. U I think we have been invest in this for over a decade, we're very happy how it performs and I would like everybody to follow what we're going to show in an ounce at the upcoming Tech summit in October . Thank you very much.

Ladies and gentlemen. This concludes today's conference call you may now disconnect.

[noise].