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Digimarc (DMRC)

Q4 2011 Earnings Call

February 23, 2012 5:00 pm ET


Bruce Davis - Chairman and Chief Executive Officer

Michael McConnell - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer


Matthew Galinko - Sidoti & Company, LLC

Corey Barrett

Paul Sonz

Andrew Wiener



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Good afternoon and thank you for participating in today's conference call. I would now turn the call over to Chairman and CEO of Digimarc, Bruce Davis. Mr. Davis, please proceed.

Bruce Davis

Thank you. Good afternoon. Welcome to our conference call. Mike McConnell, our CFO, is with me. On the call today, we'll review and discuss our 2011 financial results, talk about significant business developments and market conditions and provide an update on our strategy and operations. This webcast will be archived in the Investor Relations section of our website.

Please note that during the course of this call, we'll be making certain forward-looking statements including those regarding revenue recognition matters, results of operations, investments, initiatives and growth strategies. These statements are subject to many assumptions, risks, uncertainties and changes in circumstances. Any assumptions we offer about future performance represent a point-in-time estimate. And actual results may vary materially from those expressed or implied by such statements.

We expressly disclaim any obligation to revise or update any assumptions, projections or other forward-looking statements to reflect events or circumstances that may arise after the date of this conference call. For more information about risk factors that may cause actual results to differ from expectations, please see the company's filings with the SEC, including our latest Form 10-Q.

Mike will begin by commenting on our financial results. I will then discuss our outlook and execution of strategy. Mike?

Michael McConnell

Thanks, Bruce, and good afternoon, everyone. Overall, our 2011 revenues increased by 16% to $36 million from $31.2 million in 2010, and our net income improved 36% to $5.7 million or $0.76 per diluted share compared to $4.2 million or $0.55 per diluted share in 2010.

Balance sheet remains in excellent shape with more than $33 million in cash and securities and no debt. Throughout the past year, we made a number of strategic investments in the company. We repurchased more than 700,000 shares for more than $20 million. We invested in potential growth areas, including developing and marketing Digimarc Discover, developing the second wave of retaining the patents and doing foundational work in our joint ventures with Nielsen, all in support of our vision of enabling computers, networks and other digital devices to see, hear, understand and respond to the surroundings.

We also had some extraordinary spending on litigation with Verance that was settled favorably in January 2012, resulting in extension of our license with them and payment of $8.9 million of past royalties. More specifically for 2011, our 16% revenue growth was primarily attributable to higher revenues from Intellectual Ventures and Verance. Our gross margin was 81%, 33 points higher than the prior year reflecting a greater mix of license revenues to our total. We experienced higher operating expenses reflecting investments and new product initiatives and approximately $1.7 million of Verance litigation costs.

Our operating profit was $6.4 million, or 18% of revenues. We contributed $2 million in capital towards our R&D joint ventures with Nielsen, where our share of the net loss for the year was $2.7 million. And our referred tax asset valuation reserve of $2.6 million was reversed in the second quarter of 2011, reflecting the determination that it's more likely than not that our deferred tax assets will be realized in current and future periods.

Assessing our financial performance for 2011, we note that most of the financial planning assumptions we made at the beginning of the year were either met or exceeded. Specifically, we assumed double-digit revenue growth for the year and revenues grew at 16%. We assumed a license to service revenue ratio of approximately 60% to 40% resulting in gross margin of 70%. The ratio turned out to be 66% and 34% with the gross margin at 81%. We expected revenues and operating income to be more consistent on a quarter-to-quarter basis then was the case in 2010 with the first quarter being the smallest of the 4. This did not turn out to be the case due largely due to the Verance litigation and its effects. Lastly, we assumed operating cash flow would be greater than GAAP earnings due primarily to more than $5 million of noncash charges associated with stock compensation and depreciation.

Our operating cash flow ended up just north of $10.2 million compared to GAAP income of $5.7 million. Looking forward, our financial assumptions for 2012 include double-digit revenue growth for the year with more than $35 million coming from a combination of a beginning backlog and receipt of past due royalties from Verance in January of 2012. We expect our license to service revenues ratio will be closer to a 70%, 30% split and resulting gross margins near 80%. We'll continue to invest in our growth initiatives, including directed research and intellectual property development and marketing and development of Digimarc Discover.

Operating expenses should come in lower than 2011 with Q1 being the highest level, reflecting completion of the Verance litigation. We expect our operating cash flow to be greater than GAAP earnings, due primarily to more than $6 million of noncash charges associated with stock compensation and depreciation. And we're planning for a combined federal and state income tax rate of approximately 38%. I could end up being several points lower if the Feds reinstate the research and development tax credits.

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