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Digimarc Reports Third Quarter 2023 Financial Results

Annual Recurring Revenue1 Increases 54%

Subscription Gross Profit Margin Expands to 85.5%

Digimarc Corporation (NASDAQ: DMRC) reported financial results for the third quarter ended September 30, 2023.

"Q3 was another strong quarter for Digimarc. We delivered a 54% year-over-year increase in our ending Annual Recurring Revenue (ARR) while driving a 1,000-basis point year-over-year increase in subscription gross profit margin," said Digimarc CEO Riley McCormack. "Our focus on being easy to begin doing business with and excellent at guiding customers along their product digitization journey is paying off, and our recent expansion of Digimarc Validate to the digital domain provides an additional accelerant as it significantly increases our Total Addressable Market (TAM) and meaningfully strengthens our moats -- across all areas of our business. It is becoming clear to many stakeholders that our legacy as the pioneer and widely recognized leader of digital watermarking, coupled with our history of building massive, multinational, multistakeholder, and mission critical systems on top of our technology, has ideally positioned us to provide the foundational layer of a safe, fair, trusted, and authentic internet, something that was needed before the rise of generative artificial intelligence, but is absolutely required today."

Third Quarter 2023 Financial Results

Subscription revenue for the third quarter of 2023 increased to $4.8 million compared to $4.1 million for the third quarter of 2022, primarily reflecting higher subscription revenue from new and existing commercial contracts.

Service revenue for the third quarter of 2023 increased to $4.2 million compared to $3.7 million for the third quarter of 2022, primarily reflecting higher service revenue from the Central Banks.

Total revenue for the third quarter of 2023 increased to $9.0 million compared to $7.8 million for the third quarter of 2022.

Gross profit margin for the third quarter of 2023 increased to 58% compared to 53% for the third quarter of 2022. Excluding amortization expense on acquired intangible assets, subscription gross profit margin increased to 85% from 75% while service gross profit margin decreased to 54% from 57% for the third quarter of 2023 compared to the third quarter of 2022.

Non-GAAP gross profit margin for the third quarter of 2023 increased to 76% compared to 72% for the third quarter of 2022.

Operating expenses for the third quarter of 2023 decreased $3.3 million, or 17%, to $16.4 million compared to $19.7 million for the third quarter of 2022, primarily reflecting $1.4 million of lower severance costs incurred for organizational changes, $1.1 million of lower compensation costs due to lower headcount, partially offset by annual compensation adjustments, and $0.6 million of lower contractor and consulting expenses.

Non-GAAP operating expenses for the third quarter of 2023 decreased $2.3 million, or 15%, to $13.2 million compared to $15.5 million for the third quarter of 2022.

Net loss for the third quarter of 2023 was $10.7 million or $(0.53) per share compared to $14.9 million or $(0.76) per share for the third quarter of 2022.

Non-GAAP net loss for the third quarter of 2023 was $5.9 million or $(0.29) per share compared to $9.3 million or $(0.47) per share for the third quarter of 2022.

At September 30, 2023, cash, cash equivalents, and marketable securities totaled $33.3 million compared to $34.5 million at June 30, 2023.

1 Annual Recurring Revenue (ARR) is a company performance metric calculated as the aggregation of annualized subscription fees from all of our commercial contracts as of the measurement date.

Conference Call

Digimarc will hold a conference call today (Monday, November 6, 2023) to discuss these financial results and to provide a business update. CEO Riley McCormack, CFO Charles Beck, and CLO Joel Meyer will host the call starting at 5:00 p.m. Eastern time (2:00 p.m. Pacific time). A question-and-answer session will follow management’s prepared remarks.

The conference call will be broadcast live and available for replay here and in the investor section of the company's website. The conference call script will also be posted to the company's website shortly before the call.

For those who wish to call in via telephone to ask a question, please dial the number below at least five minutes before the scheduled start time:

Toll-Free Number: 877-407-0832

International Number: 201-689-8433

Conference ID: 13737195

About Digimarc

Digimarc Corporation (NASDAQ: DMRC) is a global leader in product digitization. A pioneer in digital watermarks, Digimarc connects every physical and digital item to a digital twin that enables the capture of product data, records events and interactions, and supports powerful new automations. Trusted to deter counterfeiting of global currency for more than 20 years, Digimarc is also recognized for ensuring product authenticity, improving plastics recycling, and more, with a commitment to promoting a prosperous, safer, and more sustainable world. In 2023, Digimarc was named to the Fortune 2023 Change the World list and honored as a 2023 Fast Company World Changing Ideas finalist. See more at digimarc.com.

Forward-Looking Statements

Except for historical information contained in this release, the matters described in this release contain various “forward-looking statements.” These forward-looking statements include statements identified by terminology such as “will,” “should,” “expects,” “estimates,” “predicts” and “continue” or other derivations of these or other comparable terms. These forward-looking statements are statements of management's opinion and are subject to various assumptions, risks, uncertainties and changes in circumstances. Actual results may vary materially from those expressed or implied from the statements in this release as a result of changes in economic, business and regulatory factors. More detailed information about risk factors that may affect actual results are outlined in the company's Form 10-K for the year ended December 31, 2022, and in subsequent periodic reports filed with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date of this release. Except as required by law, Digimarc undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this release.

Non-GAAP Financial Measures

This release contains the following non-GAAP financial measures: Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP loss per share (diluted). See below for a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure. These non-GAAP financial measures are an important measure of our operating performance because they allow management, investors and analysts to evaluate and assess our core operating results from period-to-period after removing non-cash and non-recurring activities that affect comparability. Our management uses these non-GAAP financial measures in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparisons.

Digimarc believes that providing these non-GAAP financial measures, together with the reconciliation to GAAP, helps management and investors make comparisons between us and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measures and the corresponding GAAP measures provided by each company under applicable SEC rules. These non-GAAP financial measures are not measurements of financial performance or liquidity under GAAP. In order to facilitate a clear understanding of its consolidated historical operating results, investors should examine Digimarc’s non-GAAP financial measures in conjunction with its historical GAAP financial information, and investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to, GAAP financial measures. Non-GAAP financial measures may not be indicative of the historical operating results of the Company nor are they intended to be predictive of potential future results.

Digimarc Corporation

Consolidated Income Statement Information

(in thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended

September 30,

Nine Months Ended

September 30,

 

2023

2022

2023

2022

Revenue:

 

 

 

 

Subscription

$

4,811

 

$

4,086

 

$

13,374

 

$

11,121

 

Service

 

4,183

 

 

3,735

 

 

12,193

 

 

11,858

 

Total revenue

 

8,994

 

 

7,821

 

 

25,567

 

 

22,979

 

Cost of revenue:

 

 

 

 

Subscription (1)

 

698

 

 

1,006

 

 

2,264

 

 

2,934

 

Service (1)

 

1,938

 

 

1,602

 

 

5,621

 

 

5,177

 

Amortization expense on acquired intangible assets

 

1,135

 

 

1,048

 

 

3,346

 

 

3,362

 

Total cost of revenue

 

3,771

 

 

3,656

 

 

11,231

 

 

11,473

 

Gross profit:

 

 

 

 

Subscription (1)

 

4,113

 

 

3,080

 

 

11,110

 

 

8,187

 

Service (1)

 

2,245

 

 

2,133

 

 

6,572

 

 

6,681

 

Amortization expense on acquired intangible assets

 

(1,135

)

 

(1,048

)

 

(3,346

)

 

(3,362

)

Total gross profit

 

5,223

 

 

4,165

 

 

14,336

 

 

11,506

 

Gross profit margin:

 

 

 

 

Subscription (1)

 

85

%

 

75

%

 

83

%

 

74

%

Service (1)

 

54

%

 

57

%

 

54

%

 

56

%

Total

 

58

%

 

53

%

 

56

%

 

50

%

 

 

 

 

 

Operating expenses:

 

 

 

 

Sales and marketing

 

5,366

 

 

7,684

 

 

16,770

 

 

23,702

 

Research, development and engineering

 

6,308

 

 

7,575

 

 

20,295

 

 

19,731

 

General and administrative

 

4,433

 

 

4,132

 

 

13,412

 

 

15,027

 

Amortization expense on acquired intangible assets

 

272

 

 

301

 

 

800

 

 

964

 

Impairment of lease right of use assets and leasehold improvements

 

 

 

 

 

250

 

 

574

 

Total operating expenses

 

16,379

 

 

19,692

 

 

51,527

 

 

59,998

 

 

 

 

 

 

Operating loss

 

(11,156

)

 

(15,527

)

 

(37,191

)

 

(48,492

)

Other income, net

 

478

 

 

623

 

 

1,870

 

 

1,214

 

Loss before income taxes

 

(10,678

)

 

(14,904

)

 

(35,321

)

 

(47,278

)

Provision for income taxes

 

(45

)

 

(26

)

 

(65

)

 

(72

)

Net loss

$

(10,723

)

$

(14,930

)

$

(35,386

)

$

(47,350

)

 

 

 

 

 

Loss per share:

 

 

 

 

Loss per share — basic

$

(0.53

)

$

(0.76

)

$

(1.76

)

$

(2.51

)

Loss per share — diluted

$

(0.53

)

$

(0.76

)

$

(1.76

)

$

(2.51

)

Weighted average shares outstanding — basic

 

20,217

 

 

19,721

 

 

20,158

 

 

18,877

 

Weighted average shares outstanding — diluted

 

20,217

 

 

19,721

 

 

20,158

 

 

18,877

 

(1)

Cost of revenue, Gross profit and Gross profit margin for Subscription and Service excludes amortization expense on acquired intangible assets.

Digimarc Corporation

Reconciliation of GAAP to Non-GAAP Financial Measures

(in thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended

September 30,

Nine Months Ended

September 30,

 

2023

2022

2023

2022

GAAP gross profit

$

5,223

 

$

4,165

 

$

14,336

 

$

11,506

 

Amortization of acquired intangible assets

 

1,135

 

 

1,048

 

 

3,346

 

 

3,362

 

Amortization and write-off of other intangible assets

 

143

 

 

145

 

 

433

 

 

430

 

Stock-based compensation

 

310

 

 

270

 

 

866

 

 

736

 

Non-GAAP gross profit

$

6,811

 

$

5,628

 

$

18,981

 

$

16,034

 

Non-GAAP gross profit margin

 

76

%

 

72

%

 

74

%

 

70

%

 

 

 

 

 

GAAP operating expenses

$

16,379

 

$

19,692

 

$

51,527

 

$

59,998

 

Depreciation and write-off of property and equipment

 

(223

)

 

(316

)

 

(911

)

 

(1,036

)

Amortization of acquired intangible assets

 

(272

)

 

(301

)

 

(800

)

 

(964

)

Amortization and write-off of other intangible assets

 

(228

)

 

(4

)

 

(276

)

 

(63

)

Amortization of lease right of use assets under operating leases

 

(94

)

 

(248

)

 

(426

)

 

(768

)

Stock-based compensation

 

(2,382

)

 

(3,298

)

 

(7,280

)

 

(8,574

)

Impairment of lease right of use assets and leasehold improvements

 

 

 

 

 

(250

)

 

(574

)

Acquisition-related expenses

 

 

 

 

 

 

 

(447

)

Non-GAAP operating expenses

$

13,180

 

$

15,525

 

$

41,584

 

$

47,572

 

 

 

 

 

 

GAAP net loss

$

(10,723

)

$

(14,930

)

$

(35,386

)

$

(47,350

)

Total adjustments to gross profit

 

1,588

 

 

1,463

 

 

4,645

 

 

4,528

 

Total adjustments to operating expenses

 

3,199

 

 

4,167

 

 

9,943

 

 

12,426

 

Non-GAAP net loss

$

(5,936

)

$

(9,300

)

$

(20,798

)

$

(30,396

)

 

 

 

 

 

GAAP loss per share (diluted)

$

(0.53

)

$

(0.76

)

$

(1.76

)

$

(2.51

)

Non-GAAP net loss

$

(5,936

)

$

(9,300

)

$

(20,798

)

$

(30,396

)

Non-GAAP loss per share (diluted)

$

(0.29

)

$

(0.47

)

$

(1.03

)

$

(1.61

)

Digimarc Corporation

Consolidated Balance Sheet Information

(in thousands)

(Unaudited)

 

 

September 30,

December 31,

 

2023

2022

ASSETS

 

 

Current assets:

 

 

Cash and cash equivalents (1)

$

32,335

 

$

33,598

 

Marketable securities (1)

 

996

 

 

18,944

 

Trade accounts receivable, net

 

7,042

 

 

5,427

 

Other current assets

 

4,578

 

 

6,172

 

Total current assets

 

44,951

 

 

64,141

 

Property and equipment, net

 

1,656

 

 

2,390

 

Intangibles, net

 

28,977

 

 

33,170

 

Goodwill

 

8,323

 

 

8,229

 

Lease right of use assets

 

4,108

 

 

4,720

 

Other assets

 

827

 

 

1,127

 

Total assets

$

88,842

 

$

113,777

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

Current liabilities:

 

 

Accounts payable and other accrued liabilities

$

6,207

 

$

5,989

 

Deferred revenue

 

7,315

 

 

4,145

 

Total current liabilities

 

13,522

 

 

10,134

 

Long-term lease liabilities

 

6,170

 

 

5,977

 

Other long-term liabilities

 

267

 

 

76

 

Total liabilities

 

19,959

 

 

16,187

 

 

 

 

Shareholders’ equity:

 

 

Preferred stock

 

50

 

 

50

 

Common stock

 

20

 

 

20

 

Additional paid-in capital

 

373,844

 

 

367,692

 

Accumulated deficit

 

(301,195

)

 

(265,809

)

Accumulated other comprehensive loss

 

(3,836

)

 

(4,363

)

Total shareholders’ equity

 

68,883

 

 

97,590

 

 

 

 

Total liabilities and shareholders’ equity

$

88,842

 

$

113,777

 

(1)

Aggregate cash, cash equivalents, and marketable securities was $33,331 and $34,542 at September 30, 2023 and June 30, 2023, respectively.

Digimarc Corporation

Consolidated Cash Flow Information

(in thousands)

(Unaudited)

 

 

Nine Months Ended September 30,

 

2023

2022

Cash flows from operating activities:

 

 

Net loss

$

(35,386

)

$

(47,350

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

Depreciation and write-off of property and equipment

 

911

 

 

1,036

 

Amortization of acquired intangible assets

 

4,146

 

 

4,326

 

Amortization and write-off of other intangible assets

 

709

 

 

493

 

Amortization of lease right of use assets under operating leases

 

426

 

 

768

 

Stock-based compensation

 

8,146

 

 

9,310

 

Impairment of lease right of use assets and leasehold improvements

 

250

 

 

574

 

Changes in operating assets and liabilities:

 

 

Trade accounts receivable

 

(1,581

)

 

(241

)

Other current assets

 

1,688

 

 

(2,233

)

Other assets

 

279

 

 

(611

)

Accounts payable and other accrued liabilities

 

299

 

 

(2,153

)

Deferred revenue

 

3,298

 

 

233

 

Lease liability and other long-term liabilities

 

136

 

 

(1,040

)

Net cash used in operating activities

 

(16,679

)

 

(36,888

)

 

 

 

Cash flows from investing activities:

 

 

Net cash paid for acquisition

 

 

 

(3,512

)

Purchase of property and equipment

 

(208

)

 

(783

)

Capitalized patent costs

 

(295

)

 

(404

)

Proceeds from maturities of marketable securities

 

26,696

 

 

17,498

 

Purchases of marketable securities

 

(8,664

)

 

(5,873

)

Net cash provided by investing activities

 

17,529

 

 

6,926

 

 

 

 

Cash flows from financing activities:

 

 

Issuance of common stock, net of issuance costs

 

 

 

58,220

 

Purchase of common stock

 

(2,036

)

 

(1,560

)

Repayment of loans

 

(33

)

 

(32

)

Net cash (used in) provided by financing activities

 

(2,069

)

 

56,628

 

Effect of exchange rate on cash

 

(44

)

 

(100

)

Net (decrease) increase in cash and cash equivalents (2)

$

(1,263

)

$

26,566

 

 

 

 

 

 

 

Cash, cash equivalents and marketable securities at beginning of period

 

52,542

 

 

41,618

 

Cash, cash equivalents and marketable securities at end of period

 

33,331

 

 

56,357

 

(2) Net (decrease) increase in cash, cash equivalents and marketable securities

$

(19,211

)

$

14,739

 

 

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