Digimarc CORP Q4 FY2024 earnings call

• Corporate reorganization announced to align operations to authentication use case opportunities, expecting annualized cash savings of approximately $16.5 million and other annualized cash cost savings of approximately $5.5 million, with one-time reorganization costs of approximately $3 million recognized this quarter.
• Focus on authentication use cases, including assisting retailers fight shrink (gift cards and PLU fraud), continuing to develop physical anti-counterfeit solutions with technological advancements, and applying platform to combat digital fraud.
• Advancements in invention and market development, such as breakthroughs in copy detection, copy deterrence, tamper evidence, and work with leading laser companies for digital watermark application.
• Ecosystem-driven opportunities like Digimarc Validate Media, Digimarc Recycle, and Digimarc Retail Experience, with ongoing work and pilots, though some face delays due to market or political changes.
• Cost reduction through reorg, with majority of position reductions in R&D, Product and Engineering, and back-office support functions, while quota-carrying headcount has increased.

Ending ARR at the end of Q4 2024 was $20 million, compared to $22.3 million at the end of Q4 last year. Excluding the $5.8 million commercial contract that lapsed, ARR grew $3.5 million during the year, representing year-on-year growth of 21%. For the quarter, total revenue was $8.7 million, a decrease of $600,000, or 7% from $9.3 million in Q4 last year. Subscription revenue, accounting for 58% of total revenue for the quarter, decreased 10% from $5.6 million to $5 million. Service revenue was essentially flat at $3.6 million. For the full year 2024, total revenue was $38.4 million, an increase of $3.6 million, or 10% from $34.9 million in fiscal 2023. Subscription revenue, accounting for 58% of total revenue for the year, increased 18% from $19 million to $22.4 million. Service revenue was essentially flat at $16 million.

• Expect to achieve non-GAAP profitability by no later than Q4 2025, with final timing dependent on ARR growth trajectory.
• Anticipate significant top line growth in 2026, driven by penetration of focus markets.
• Being on the cusp of turning free cash flow positive has opened strategic alternatives, partnering with Goldman Sachs to explore options including going private, with no deadlines set for decisions.

• Potential delays in closing large commercial customer deals, with the biggest risk being the time allocated to the customer instead of reallocating resources to other developments.
• Changes in government programs affecting contracts, such as the DRS contract lapse due to government requirement changes on the eve of program launch, though unrelated to technology value.
• Uncertainties in market adoption of new solutions, particularly in ecosystem-driven opportunities where timing and full realization are not guaranteed.

Q: Regarding the large commercial customer opportunity, how are resources being allocated following the reorg and can the opportunity still be pursued while pivoting go-to-market?

A: The opportunity is still there, in conversations for next steps. Resources are focused on other areas for now, but the opportunity could be de-scoped. If it comes in 2025, it would be significant upside.

Q: What products and opportunities would highlight near term sequential growth in ARR?

A: Gift cards and physical anti-counterfeit solutions, including greenfield things like new watermark applications and other authentication space areas. Also, revenue from Engage, Digital Link, and partnerships.

Q: How much of free cash flow breakeven is dependent on revenue growth vs cost cuts?

A: Both are involved. Q1 has reorg costs, but starting in March, significant cash cost savings will kick-in, with revenue growth also expected. Normalized run rate of operating expenses and cost reductions will drive towards free cash flow breakeven.

Q: Timeline and proof points for Belgium license pilot project?

A: Belgium pilot with central buyer, focusing on higher quality and quantity of recyclate and novel data. The pilot aims to prove value for broader commercial use in Europe, with data being a key shining star.

Q: On contracts, including Walmart and DRS, details?

A: Walmart contracts have some in force, others lapsed due to government program changes. DRS contract lapsed due to government requirement changes on program launch, but other opportunities with the partner exist.

Q: Clarification on price look-up fraud application and technology advancements?

A: Work with Picadeli and a U.S.-based retail customer on PLU fraud. Technological advancements include copy deterrence, copy detection, tamper evident, new watermark application methods, and loyalty/reward programs using serialized QR codes.

Q: Factory automation and resource allocation?

A: Digimarc Automate use case has a robust ecosystem of partners who can advance deals without heavy involvement, leveraging the Center of Expertise program.