Digimarc Corporation Reports First Quarter Financial Results

First quarter consolidated revenue totaled $27.2 million, 12%higher than revenues of $24.4 million in the comparable period of2005. First quarter net loss was $(6.2) million, or net loss of$(0.30) per fully diluted share, compared with net loss of $(5.1)million, or net loss of $(0.25) per fully diluted share, for the sameperiod last year.

Effective January 1, 2006, the Company changed its estimate ofdepreciable lives used for its program assets. Prior to January 1,2006, the Company's depreciable life assumption had been that ingeneral, the useful lives of program assets were equal to the initialterm of the contract associated with the program. This change was madeto better match depreciation expense with the estimated useful lifeof, and the related revenue stream from, these assets. This change inestimate had the effect of reducing depreciation expense by $2.1million, or $0.10 per share, in the first quarter of 2006.

First quarter operating expenses totaled $14.0 million, 3% higheras compared to operating expenses of $13.5 million for the same periodlast year. Cash flow from operations was positive at $0.4 million, asubstantial improvement from negative $(4.3) million from the sameperiod last year.

According to Digimarc Chairman and CEO Bruce Davis, "We completeda number of projects in addition to improving the quality of a numberexisting customer installations in Q1. These activities, coincidentwith delays in the startup of some anticipated capital programs,contributed to the loss for the quarter. We believe that the slowdownin bids and project initiations and general purchasing will persistfor a while longer while the market awaits publication of federalregulations affecting driver licenses later this year. Our operationalimprovements and a quieter than normal market environment allow us tostep up the pace of progress toward profitability, by cutting fixedcosts through further streamlining operations. We intend to implementmeasures shortly that will significantly reduce fixed expense runrates during the second half of 2006."

Davis expects the lull in the market to be short-lived, furthernoting that "We expect that the market will demonstrate strong demandonce the ambiguities are resolved and that the changes that we will bemaking will not affect our ability to serve the increased demand amongour government customers. As the leading supplier, we believe that weare well-positioned to capitalize on increasing demands for driverlicense security flowing from broader use of the credential ineveryday life and the new federal mandates that are pending. Thisenhanced value foreshadows significant technology upgrades throughoutthe entire issuance process. Elsewhere, in our licensing of digitalwatermarking technology, momentum in adoption of digital watermarkingcontinues to grow, as evidenced by a number of announcements duringthe quarter."

First quarter business highlights

-- New six-year contract with the Indiana Bureau of Motor Vehicles (BMV) to supply a new driver license issuance system, including a number of innovations in driver license security and system architecture, to help the State provide the highest level of customer service and security to its citizens.

-- Introduction of Digimarc ExianEvident3D, a breakthrough in secure ID credentials designed to deliver "see, feel and machine-validate" authentication by allowing issuers to personalize an ID to a card holder in multiple ways - with high-resolution printing and laser engraving, with a unique 3D tactile security feature that a card inspector can feel, and with machine-readable digital watermarking.

-- Successful implementation by the State of Iowa of a new, highly secure digital driver license system that includes Digimarc IDMarc digital watermarking and Digimarc ExianDual card architecture for instant issuance environments.

-- Announced the issuance of more than 30 new U.S. patents covering a range of innovations that enable better management and protection of entertainment content such as music and movies.

-- Formation by the Distributed Computing Industry Association (DCIA) of the Peer-to-Peer Digital Watermarking Group to leverage the power of digital watermarking to identify and protect copyrighted music, movies and images distributed across peer-to-peer file-sharing networks (see the DCIA's announcement at: http://i-newswire.com/pr53876.html).

Early second quarter highlights include:

-- An agreement with Microsoft to embed Digimarc digital watermarks into tens of millions of satellite images served up by Microsoft's Virtual Earth platform offering as a means to communicate and protect image copyrights.

-- A new licensing agreement with Madrid, Spain-based, AquaMobile to bring Digimarc(R) Mobile(TM) print-to-web linking technology to the Spanish and Portuguese mobile markets for a variety of innovative mobile consumer and business applications.

-- A contract extension, valued at an estimated $2.4 million over the next year, with Russian partner Opticheskaya Tekhnika i Tekhnologiya (OTT) to supply secure ID materials for an estimated 30% increase in driver license issuance volume for the Russian driver license program. The market-leading driver license system is deployed at 744 issuing offices across the Russian Federation.

Conference Call

Digimarc will hold its first quarter 2006 earnings conference callon Monday, May 8 at 7:45 a.m. PT / 10:45 a.m. ET. The call will beopen to the general public and the media, and will be broadcast liveby Web cast at www.digimarc.com and www.earnings.com. At Digimarc'sWeb address, the call will be available by clicking on the "Q1 2006Earnings Release Conference Call" icon on the "Investor RelationsEvents" page. This Web cast will also be available for later listeningat both sites for two weeks following the live call. Thereafter, theWeb cast will be archived and available athttp://www.digimarc.com/investor/events.asp under the subcategory"Company Presentations."

About Digimarc

Digimarc Corporation (NASDAQ:DMRC), based in Beaverton, Oregon,is a leading supplier of secure identity and media managementsolutions. Digimarc provides products and services that enable theannual production of more than 60 million personal identificationdocuments, including two-thirds of U.S. driver licenses and IDs formore than 20 countries. Digimarc's digital watermarking technologyprovides a persistent digital identity for various media content andis used to enhance the security of financial documents, identitydocuments and digital images, and support other media rightsmanagement applications.

Digimarc has an extensive intellectual property portfolio, withmore than 240 issued U.S. patents with more than 5,000 claims, andapproximately 500 pending patent applications in digital watermarking,personal identification and related technologies. The Company isheadquartered in Beaverton, Oregon, with other U.S. offices inBurlington, Massachusetts; Fort Wayne, Indiana; and the Washington DCarea; and international offices in London and Mexico. Please go towww.digimarc.com for more company information.

Securities Safe Harbor

With the exception of historical information contained in thisrelease, the matters described herein contain certain "forward-lookingstatements" that are made pursuant to the "safe harbor" provisions ofthe Private Securities Litigation Reform Act of 1995. Suchforward-looking statements include statements regarding Digimarc'slong-term outlook, Digimarc's ability to capitalize on new driverlicense security demands, the duration of the slowdown in bids andproject initiations and general purchasing, Digimarc's ability to cutfixed costs without affecting its ability to serve the expectedincrease in market demand, and the value of Digimarc's contractextension with OTT, as well as statements containing the words"believes," "expects," "estimates," "anticipates," "will" or words ofsimilar import or statements of management's opinion. These statementsare subject to certain assumptions, risks, uncertainties and changesin circumstances. Actual results may vary materially from thoseexpressed or implied from the statements herein or from historicalresults, due to, among other things, unexpected expenses, changes inthe market for Digimarc's products and services, and the loss of anylarge contract, as well as changes in economic, business, competitive,technological and/or regulatory factors. More detailed informationabout risk factors that may affect actual results is set forth infilings by Digimarc with the Securities and Exchange Commission onForms 10-K, 10-Q and 8-K, including but not limited to those describedin the Company's Form 10-K for the year ended December 31, 2005, inPart II, Item 7 thereof ("Management's Discussion and Analysis ofFinancial Condition and Results of Operations") under the captions"Liquidity and Capital Resources" and "Factors Affecting ForwardLooking Statements" and in Part II, Item 9A thereof ("Controls andProcedures"). Readers are cautioned not to place undue reliance onthese forward-looking statements, which reflect management's opinionsonly as of the date of this release. Except as required by law, weundertake no obligation to revise or publicly release the results ofany revision to these forward-looking statements.
Digimarc Corporation
Income Statement Information
(in thousands, except per share amounts)
(Unaudited)


Three Months Ended
----------------------------------
March 31, December 31, March 31,
2006 2005 2005
--------- ------------ ---------
Revenue:
Service $22,290 $21,107 $19,596
Product and
subscription 4,903 4,033 4,783
--------- ------------ ---------
Total revenue 27,193 25,140 24,379

Cost of Revenue:
Service 17,099 17,016 13,724
Product and
subscription 2,549 1,476 2,353
--------- ------------ ---------
Total cost of
revenue 19,648 18,492 16,077

Gross Profit:
Service 5,191 4,091 5,872
Product and
subscription 2,354 2,557 2,430
--------- ------------ ---------
Total gross
profit 7,545 6,648 8,302

Percentage of gross profit
to revenues:
Service 23% 19% 30%
Product and
subscription 48% 63% 51%
Percentage of
total gross
profit to total
revenues 28% 26% 34%

Operating expenses:
Sales and
marketing 4,539 3,816 3,777
Research,
development and
engineering 3,236 3,596 2,908
General and
administrative 5,210 5,654 5,497
Amortization of
intangibles 573 738 811
Intellectual
property 431 483 536
--------- ------------ ---------
Total operating
expenses 13,989 14,287 13,529
--------- ------------ ---------

Operating income
(loss) (6,444) (7,639) (5,227)

Other income
(expense), net 357 156 184
--------- ------------ ---------
Income (loss) before
provision for
income taxes (6,087) (7,483) (5,043)
Provision for
income taxes (85) (49) (77)
--------- ------------ ---------
Net income (loss) $(6,172) $(7,532) $(5,120)
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Net income (loss)
per share - basic $(0.30) $(0.37) $(0.25)
Net income (loss)
per share - diluted $(0.30) $(0.37) $(0.25)

Weighted average
shares - basic 20,607 20,522 20,453
Weighted average
shares - diluted 20,607 20,522 20,453



Digimarc Corporation
Cost of Revenue
(in thousands, except per share amounts)
(Unaudited)


Three Months Ended
--------------------------------------
March 31, December 31, March 31,
2006 2005 2005
--------- ------------ ---------
Cost of Revenue:
Variable $8,317 $7,075 $7,281
Fixed field support
and manufacturing 8,743 7,088 6,013
Program depreciation 2,588 4,329 2,783
--------- ------------ ---------
Total cost of revenue $19,648 $18,492 $16,077
========= ============ =========


Cost of Revenue (as a % of total
revenue):
Variable 30.6% 28.1% 29.9%
Fixed field support
and manufacturing 32.2% 28.2% 24.7%
Program depreciation 9.5% 17.2% 11.4%
--------- ------------ ---------
Total cost of revenue 72.3% 73.6% 65.9%
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Digimarc Corporation
Balance Sheet Information
(in thousands)
(Unaudited)


March 31, December 31,
2006 2005
------------ ------------
Assets
Current assets:
Cash and cash equivalents $23,224 $23,964
Short-term investments 1,001 739
------------ ------------
Total cash, cash equivalents
and investments 24,225 24,703
Accounts receivable, net 13,166 15,697
Inventory, net 5,843 7,451
Other current assets 2,223 2,828
------------ ------------
Total current assets 45,457 50,679

Restricted cash 6,780 7,279
Property and equipment, net 62,045 64,108
Intangibles, net 16,591 17,164
Other assets, net 976 1,009
------------ ------------
Total assets $131,849 $140,239
============ ============


Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $5,326 $6,722
Accrued payroll and related costs 2,901 3,731
Deferred revenue 5,965 6,809
Other current liabilities 1,894 2,032
------------ ------------
Total current liabilities 16,086 19,294

Other long-term liabilities 1,160 969

Stockholders' equity 114,603 119,976
------------ ------------
Total liabilities and stockholders'
equity $131,849 $140,239
============ ============



Digimarc Corporation
Cash Flow Information
(in thousands)
(Unaudited)

Three Months Ended
----------------------------------
March 31, December 31, March 31,
2006 2005 2005
--------- ------------ ---------

Cash flows from operating
activities:
Net loss $(6,172) $(7,532) $(5,120)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,818 5,722 3,430
Stock-based compensation expense 794 151 51
Change in allowance for doubtful
accounts (64) 35 (33)
Other non-cash charges - (53) 17
Changes in operating assets
and liabilities:
Restricted cash 499 7 (92)
Trade and unbilled accounts
receivable, net 2,595 104 (1,545)
Inventory, net 1,608 1,088 (147)
Other current assets 605 (219) 222
Other assets, net 33 (88) 102
Accounts payable (1,396) 154 (2,219)
Accrued payroll and
related costs (830) (276) 1,265
Deferred revenue (844) 2,212 (233)
Other liabilities (214) 109 1
--------- ------------ ---------
Net cash provided by
(used in) operating
activities 432 1,414 (4,301)
Cash flows from investing activities:
Purchase of property and equipment (455) (1,505) (2,212)
Capitalization of labor costs (314) (1,343) (3,003)
Sale or maturity of short-term
investments 33,961 47,321 42,744
Purchase of short-term
investments (34,223) (41,755) (32,467)
--------- ------------ ---------
Net cash provided by
(used in) investing
activities (1,031) 2,718 5,062
Cash flows from financing activities:
Net proceeds from issuance of
common stock 5 122 -
Principal payments under capital
lease obligations (146) (132) (117)
--------- ------------ ---------
Net cash provided by
(used in) financing
activities (141) (10) (117)
--------- ------------ ---------
Net increase (decrease)
in cash and cash
equivalents $(740) $4,122 $644
========= ============ =========