Digimarc Corporation

Greetings, and welcome to the DigiMark Q1 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce George Karamanos. Please go ahead.

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'll provide a business update and discuss Q1 2025 financial results. This will be followed by a question and answer forum. We've 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. Riley will now provide a business update.

Thank you, George, and hello, everyone. As discussed on our last earnings call, we have narrowed our immediate focus to three specific opportunity sets, retail loss prevention, physical authentication, and digital authentication. In parallel, we have also ensured that we are positioned to benefit from our historical programs in other areas, either directly or through our valued partners. This tightening of focus was made possible by our recent technological and market advancements in the authentication space. As a reminder, we discussed those advancements in greater details in our last two earnings calls. It is a testament to the power of our team and our technology that we've been able to grow annual recurring revenue, or ARR, almost five times over these last four years as we've been zeroing in on areas of deep product market fit. Most companies oscillate around flat until they reach that critical milestone. We've accomplished this while applying the rigor and focus required to speed time to deep product market fit. Since the middle of 2021, we have exited businesses and de-emphasized offerings and business practices that didn't make strategic sense while also moving away from pursuing non-scalable services revenue. Adjusting for the end of life of our piracy intelligence business, we have more than tripled commercial subscription revenue since Q2 2021. We have also expanded our subscription gross margin almost 1,000 basis points, despite no longer licensing our IP to potential competitors. This decision was a headwind to both revenue and margins, as IP licensing carries 100% gross margin rate. It was also unquestionably the right thing to do to ensure our long-term success. More exciting than where we have been, however, is where we are going. On that front, I want to take a moment to reiterate what we shared on our last call. While we continue to expect lumpiness as we shift our focus to our core authentication use cases, we believe we are on the cusp of sustainable free cash flow generation for the first time in over 12 years. Moreover, beyond just achieving this important milestone, we expect to deliver significant top-line growth in free cash flow generation in 2026 and beyond. Turning now to an update on our business, our Q1 results came in above our internal plan. These results demonstrate that it is indeed possible to deliver on our much tighter focus areas while still positioning ourselves to potentially benefit from our historical work outside these specific areas. Starting with our work in retail loss prevention, we expect the first gift cards protected with our solution will appear on shelves within the next month. This is a critical milestone in our work to catalyze the industry towards meaningful adoption this year. Moreover, while the market sizing we have shared for our gift card solution only contemplates the U.S. market, we're beginning to work with partners to map out the opportunity in multiple other large geographies. The driver behind narrowing our go-to-market focus is the incredible power that comes from such focus, especially when trying to orchestrate a rollout as large and on as tight a timeline as we expect this gift card rollout will be. As discussed in greater detail in our last call, the other retail loss prevention use case that we expect to contribute to 2025 ARR is our solution addressing price lookup or PLU fraud. On this front, our initial customer will be a featured guest on the May 29th episode of the influential OmniTalk podcast to talk about the power of our solution. This level of customer advocacy is both powerful and appreciated. Turning now to our physical authentication solutions, we expect to shortly sign a fifth deal with the DigiMark Validate customer I referenced on our last call. Recall the first deal they signed with us was, the first deal was signed in Q3, 2024. Our learnings from this engagement and how we can replicate it are as valuable to us as the mid-six-figure revenue it represents. We have also formed a partnership with a fellow supplier to one of our loyalty and reward customers. We both agree with this shared customer that our solutions pair well together. As a reminder, our loyalty and reward offering involves the application of serialized QR codes and DigiMark Illuminate analytics to modernize and secure loyalty and reward programs, not the creation of the underlying programs themselves. This new partner has already introduced us to four of their more than 1,000 customers. We look forward to strengthening this new partnership one happy customer at a time. Touching now on our digital authentication solutions, as mentioned on our last call, we had chosen to be very conservative about this area's contribution to 2025 ARR. We made this decision to ensure that we were focused on optimizing our work in this area for the long term. As it turns out, it is likely this area will exceed the conservative assumptions for this fiscal year. Not only do we expect to grow the relationship with the Fortune 100 customer we discussed in the last call, we are also beginning conversations with others interested in a similar solution to help fight unauthorized leaks and or the improper usage of sensitive and valuable digital assets. Still, my message remains consistent. We will make decisions optimized for the long term, not the short term, in this area and across our entire business. Moving now to how we have positioned ourselves to benefit from other opportunities outside of our three current areas of focus, Last week, we were excited to share the news of being selected by Unilever to be their digital link vendor of choice. We also recently wanted to deal with another large CPG for this same use case. With the twin tailwinds of digital product passport and Sunrise 2027, carving out early wins in this space sets us up to help companies with their need for upcoming compliance, whether that be directly or through our value print pack partners. We were also excited to share the announcement from the Alliance to End Plastic Waste and AIM, that now is the time to scale commercial adoption of Digimark Recycle. We agree, and our initial win in Belgium, as well as our support for other opportunities this group is progressing, positions us squarely under that tree as this much-needed future unfolds. Finally, with regards to our work of identifying digital assets in the era of Gen AI, we expect to be able to soon announce a win with an important division of the United States government. When it comes to providing the safer, fairer, and more transparent internet we all deserve, this win is an important beachhead as this future unfolds. It should also act as an important point of validation as we focus on opening the digital authentication market that is currently a commercial focus. I will now turn the call over to Charles to discuss our financial results. Thank you, Riley, and hello, everyone.