Digimarc Corporation

Good afternoon and thank you for participating in today's conference call. Now I will turn the call over to Bob Chamness, Chief Legal Officer. Mr. Chamness, please proceed.

Thank you. Welcome to our Q1 conference call. Riley McCormick, our CEO, and Charles Beck, our CFO, are with me on the call. On the call today, we will discuss Q1 financial results and provide a business update. 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. 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. Charles will now comment on our Q1 financial report.

Thank you, Bob, and hello, everyone. As a reminder, the acquisition of everything closed January 3rd, 2022. In order to provide transparency, I will reference the impact the acquisition had on both of our revenue and expenses in Q1 2022. We're also starting to report non-GAAP financial measures in our Form 10Q and earnings release to improve comparability between periods. These non-GAAP financial measures include non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating expenses, non-GAAP net loss, and non-GAAP net loss per common share. We are introducing these non-GAAP measures given an increase in the number and magnitude of non-recurring and non-cash items that impact comparability between periods as well as little of the underlying performance of our business. These non-GAAP measures exclude non-cash expenses like depreciation expense, amortization expense, stock-based compensation expense, and asset impairments. They also exclude non-recurring items like transaction costs associated with business acquisitions and other non-recurring items that may arise. I will reference these non-GAAP results in my prepared remarks as well as specifically highlight the relevant amounts. While we believe these non-GAAP results provide the truest measure of the underlying performance of our business, we want to provide the information necessary for every investor to do their own analysis. We've included a reconciliation of each non-GAAP financial measure to the mostly directly comparable GAAP financial figure within our earnings release, which is available in the investor relations section of our website. First year commercial bookings were 3.8 million during the quarter. up 50% from Q1 2021. Everything contributed $600,000 in first-year bookings during Q1 2022. We are breaking out everything bookings this quarter, but as we now sell combined products, it will not be practical to provide a full breakout in the future. As I mentioned on our last earnings call, we also decided to sunset our piracy intelligence business, which resulted in 200,000 less bookings in Q1 2022 than Q1 2021. Excluding everything in the piracy intelligence business, first-year commercial bookings increased 900,000 or 42% from Q1 last year. We remind investors that first-year commercial bookings are the best leading indicator of future revenue growth. Revenue for the first quarter was $7.4 million, up 11% from $6.7 million in Q1 last year. Everything contributed $1.5 million of total revenue to the first quarter 2022 financial results. Please note that similar to bookings, it will not be practical to provide a full breakout of everything revenue in future periods, although we will try to provide color where possible. Subscription revenue increased 30% from $2.9 million to $3.8 million, with everything contributing $1.2 million. Excluding the impact of everything, subscription revenue was lowered by $300,000 due to $500,000 of upfront revenue recognition on a two-year contract in Q1 2021 partially offset by the impact of new customer contracts. The revenue impact of sunsetting the piracy intelligence business was marginal to Q1 2022 revenue, but the impact will increase through the year as contracts expire, starting in a meaningful way in the second quarter. Service revenue decreased 4% from 3.8 million to 3.6 million, with everything contributing 300,000. Excluding the impact of everything, service revenue was lowered by 500,000, reflecting the timing of program work with the central banks, which accounted for $300,000, and less revenue from professional services work. The recycling contract that we referenced on the last earnings call had no revenue impact in Q1 due to timing of the project, but we anticipate it will have significant impact on Q2 service revenue as the project is now underway. Gross profit margin for the first quarter was 45% compared to 65% in Q1 last year. The decrease in margin reflects 1.2 million of amortization expense recorded on acquired intangible assets that were recognized in the acquisition accounting for everything. These assets are required to be recognized under U.S. GAAP and amortized over their useful life. Excluding amortization expense, subscription gross profit margins were 73% and service gross profit margins were 49% for Q1 2022. versus 73% and 59% in Q1 2021. Service margins were negatively impacted this quarter as we incurred additional professional service hours above the hours that were billable on one of our service contracts. We expect service margins to improve to more normalized levels next quarter. Non-GAAP gross profit margin for Q1 2022 was 66% compared to 69% in Q1 2021. Operating expenses for the quarter were $21.4 million, up $8.8 million from Q1 last year. Everything added $4.6 million of operating expenses in the first quarter. The remaining increase of $4.2 million largely reflects $1.2 million of higher compensation costs due to higher headcount and annual compensation adjustments, higher legal, accounting, and tax costs of $700,000 related to the everything acquisition and financing activities, a $600,000 non-cash impairment charge to write down our lease right-of-use assets from our prior corporate headquarters, higher consulting costs of $500,000 related to acquisition, integration, and other corporate initiatives, and $500,000 higher travel and conference costs. The majority of these costs are not recurring costs with the exception of compensation costs and some of the consulting and travel costs. Non-GAAP operating expenses for the quarter were $17 million, up $6.8 million from Q1 last year. Everything added $4 million of non-GAAP operating expenses in the first quarter. The remaining increase of $2.8 million reflects higher headcount and annual compensation adjustments, higher legal and accounting costs related to financing activities, higher consulting costs, and higher travel and conference costs. Again, the majority of these costs outside of compensation costs and some consulting and travel costs are non-recurring. Net loss per common share for the quarter was $1.03 versus 50 cents in Q1 last year. Everything incurred a loss of 4.6 million in the first quarter, which included 1.5 million of amortization expense on acquired intangible assets. Excluding everything, net loss per common share would have been 76 cents. Non-GAAP net loss per common share for the quarter was 69 cents versus 34 cents in Q1 last year. We ended the quarter with $24.9 million in cash and investments. In early April, we raised $58.3 million of capital through a registered direct offering, whereby we sold 2.25 million shares of common stock at a price of $25.90. Adding these gross cash proceeds to our quarter end cash and investment balance would have resulted in $83.2 million of cash and investments. We used $16.7 million of cash and investments during the quarter, which included $4 million to pay the closing costs on behalf of everything, and another $3 million to pay outstanding payables owed by everything, net of $500,000 of cash acquired. Excluding these non-recurring items, we used $10.2 million of cash and investments during the quarter compared to $7.1 million in the first quarter of 2021. For further discussion on our financial results and risks and prospects for our business, Please see our Form 10-Q that will be filed with the SEC. Riley will now provide a business update.