Digimarc Reports First Quarter Results

Digimarc Corporation (NASDAQ:DMRC) today announced financial results for the first quarter ended March 31, 2007, reporting significant financial improvement over the comparable period in 2006. First quarter revenue totaled $26.8 million, 1% lower than revenue of $27.2 million for the comparable period of 2006. The first quarter net loss of $(1.0) million, or $(0.05) per fully diluted share was an improvement of $5.2 million from the net loss of $(6.2) million, or $(0.30) per fully diluted share, for the comparable period of 2006. Operating expenses for the first quarter were $11.4 million, which was 18% lower than the $14.0 million in expenses incurred in the first quarter of 2006. Cash flow from operations for the first quarter was $5.4 million, a $5.0 million improvement from the first quarter of 2006. The Company generated Adjusted EBITDA for the first quarter of $3.5 million, or 13% of revenues, an improvement of $5.3 million from $(1.8) million in the first quarter of 2006. Digimarc calculates Adjusted EBITDA by adjusting net income (loss) for the effects of interest, taxes, depreciation, amortization and non-cash expenditures for stock compensation. The reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP measure, is included at the end of this release. First quarter business highlights Media reports in the New York Times and other publications highlighted the success that Massachusetts and Kansas have had using Digimarc facial recognition-based Biometric Identification to stop driver license fraud. Adoption of Digimarc secure driver license solutions continued in Africa with a new driver license contract in Mozambique. A new Digimarc patent (U.S. Patent No. 7,171,016) was issued that proposes a solution for identifying digitally watermarked music, images or movies on multiple Internet sites. A license agreement with Card Scanning Solutions, a provider of ID scanning and verification solutions, was announced enabling Card Scanning to offer its nearly 1,000 licensees Digimarc® IDMarc™ capabilities to authenticate U.S. driver licenses at commercial points of inspection. A patent licensing agreement with USVO Inc. was announced for use of digital watermarking technology in commercially available video, pre-release video, and home marketing screening video. Conference Call Digimarc will hold its first quarter 2007 earnings conference call on Friday, May 4, 2007, at 7 a.m. PT / 10 a.m. ET. The call will be open to the general public and the media, and will be broadcast live by Web cast at www.digimarc.com and www.earnings.com. At Digimarc’s Web address, the call will be available by clicking on the "Q1 2007 Earnings Release Conference Call" icon on the "Investor Relations Events” page. This Web cast will also be available for later listening at both sites for two weeks following the live call. Thereafter, the Web cast will be archived and available at http://www.digimarc.com/investor/events.asp. About Digimarc Digimarc Corporation (NASDAQ:DMRC), based in Beaverton, Oregon, is a leading supplier of secure identity and media management solutions. Digimarc provides products and services that enable the annual production of more than 60 million personal identification documents, including two-thirds of U.S. driver licenses and IDs for more than 25 countries. Digimarc's digital watermarking technology provides a persistent digital identity for various media content and is used to enhance the security of financial documents, identity documents and digital images, and support other media rights management applications. Digimarc has an extensive intellectual property portfolio, with more than 300 issued U.S. patents with more than 6,000 claims, and more than 500 pending U.S. and foreign patent applications in digital watermarking, personal identification and related technologies. The Company is headquartered in Beaverton, Oregon, with other U.S. offices in Burlington, Massachusetts; Fort Wayne, Indiana; and the Washington DC area; and international offices in London and Mexico. Please go to www.digimarc.com for more company information. Securities Safe Harbor With the exception of historical information contained in this release, the matters described herein contain certain "forward-looking statements" that are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements containing the words "believes," "expects," "estimates," "anticipates," "will" or words of similar import or statements of management's opinion. These statements are subject to certain assumptions, risks, uncertainties and changes in circumstances. Actual results may vary materially from those expressed or implied from the statements herein or from historical results, due to changes in economic, business, competitive, technological and/or regulatory factors. More detailed information about risk factors that may affect actual results is set forth in filings by Digimarc with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K, including but not limited to those described in the Company's Form 10-K for the year ended December 31, 2006, in Part II, Item 7 thereof ("Management's Discussion and Analysis of Financial Condition and Results of Operations") under the captions "Liquidity and Capital Resources" and "Factors Affecting Forward Looking Statements" and in Part II, Item 9A thereof ("Controls and Procedures"). 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, we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Digimarc Corporation Income Statement Information (in thousands, except per share amounts) (Unaudited)   Three Months Ended March 31, Dec. 31, March 31, 2007  2006  2006  Revenue: Service $ 21,299  $ 20,458  $ 22,290  Product and subscription   5,547    4,956    4,903  Total revenue 26,846  25,414  27,193    Cost of Revenue: Service 14,715  13,578  17,099  Product and subscription   2,100    2,147    2,549  Total cost of revenue 16,815  15,725  19,648    Gross Profit: Service 6,584  6,880  5,191  Product and subscription   3,447    2,809    2,354  Total gross profit 10,031  9,689  7,545    Percentage of gross profit to revenues: Service 31% 34% 23% Product and subscription 62% 57% 48% Percentage of total gross profit to total revenues 37% 38% 28%   Operating expenses: Sales and marketing 4,277  3,691  4,539  Research, development and engineering 2,042  1,881  3,236  General and administrative 4,098  4,418  5,210  Amortization of intangibles 500  511  573  Intellectual property 499  402  431        Total operating expenses   11,416    10,903    13,989    Operating income (loss) (1,385) (1,214) (6,444)   Other income (expense), net   382    386    357  Income (loss) before provision for income taxes (1,003) (828) (6,087) Provision for income taxes   (19)   (84)   (85) Net income (loss) $ (1,022) $ (912) $ (6,172)   Net income (loss) per share - basic $ (0.05) $ (0.04) $ (0.30) Net income (loss) per share - diluted $ (0.05) $ (0.04) $ (0.30)   Weighted average shares - basic 20,797  20,692  20,607  Weighted average shares - diluted 20,797  20,692  20,607  Digimarc Corporation Cost of Revenue (in thousands, except per share amounts) (Unaudited)   Three Months Ended March 31, Dec. 31, March 31, 2007  2006  2006  Cost of Revenue: Variable $ 7,611  $ 7,079  $ 8,317  Fixed field support and manufacturing 6,439  5,880  8,743  Program depreciation   2,765    2,766    2,588  Total cost of revenue $ 16,815  $ 15,725  $ 19,648      Cost of Revenue (as a % of total revenue): Variable 29% 28% 31% Fixed field support and manufacturing 24% 23% 32% Program depreciation   10%   11%   9% Total cost of revenue   63%   62%   72% Digimarc Corporation Balance Sheet Information (in thousands) (Unaudited)   March 31, Dec. 31, 2007  2006  Assets Current assets: Cash and cash equivalents $ 21,945  $ 23,135  Restricted cash   -    378  Total cash, cash equivalents and investments 21,945  23,513  Accounts receivable, net 14,089  14,403  Inventory, net 7,130  6,600  Other current assets   1,999    2,273  Total current assets 45,163  46,789    Restricted cash 9,560  9,560  Property and equipment, net 65,378  61,898  Intangibles, net 14,899  15,374  Other assets, net   1,087    1,010  Total assets $ 136,087  $ 134,631      Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 6,644  $ 5,708  Accrued payroll and related costs 1,698  3,894  Deferred revenue 5,290  5,050  Other current liabilities   2,068    2,258  Total current liabilities 15,700  16,910    Long-term deferred revenue, net of current 7,556  5,345  Other long-term liabilities   770    885  Total liabilities 24,026  23,140    Stockholders' equity   112,061    111,491  Total liabilities and stockholders' equity $ 136,087  $ 134,631  Digimarc Corporation Cash Flow Information (in thousands) (Unaudited)   Three Months Ended March 31, Dec. 31, March 31, 2007  2006  2006  Cash flows from operating activities: Net income (loss) $ (1,022) $ (912) $ (6,172) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 3,421  3,385  3,245  Amortization of intangibles 500  511  573  Stock-based compensation expense 1,005  730  794  Change in allowance for doubtful accounts 1  18  (64) Other non-cash charges (29) (117) -  Changes in operating assets and liabilities: Restricted cash 378  -  499  Trade and unbilled accounts receivable, net 313  551  2,595  Inventory, net (530) (584) 1,608  Other current assets 234  (210) 605  Other assets, net (77) (102) 33  Accounts payable 936  913  (1,396) Accrued payroll and related costs (2,196) (201) (830) Deferred revenue 2,451  1,240  (844) Other liabilities   24    418    (214) Net cash provided by (used in) operating activities 5,409  5,640  432  Cash flows from investing activities: Purchase of property and equipment and capitalized labor costs (6,897) (3,526) (769) Purchase of intangibles -  (10) -  Sale or maturity of short-term investments 38,355  44,596  33,961  Purchase of short-term investments   (38,355)   (43,595)   (34,223) Net cash provided by (used in) investing activities (6,897) (2,535) (1,031) Cash flows from financing activities: Issuance of common stock 582  129  5  Purchase of common stock (140) (208) -  Principal payments under capital lease obligations   (144)   (142)   (146) Net cash provided by (used in) financing activities   298    (221)   (141) Net increase (decrease) in cash and cash equivalents $ (1,190) $ 2,884  $ (740)     Supplemental disclosure of cash flow information: Cash paid for interest $ 19  $ 20  $ 16  Cash paid for income taxes $ 12  $ 45  $ -  Supplemental disclosure of cash flow information: Equipment acquired or exchanged under capital lease obligations $ -  $ -  $ 413  Digimarc Corporation Reconciliation of GAAP and Non-GAAP Financial Measures Adjusted EBITDA (in thousands) (Unaudited)   Three Months Ended March 31, Dec. 31, March 31, 2007  2006  2006    Net income (loss) $ (1,022) $ (912) $ (6,172) Adjustments: Provision for taxes 19  84  85  Interest income, net (393) (363) (309) Depreciation 3,421  3,385  3,245  Amortization of intangibles 500  511  573  Stock compensation 1,005  730  794        Adjusted EBITDA $ 3,530  $ 3,435  $ (1,784) About Adjusted EBITDA From time to time, we may refer to Adjusted EBITDA in our conference calls and discussions with analysts in connection with our historical financial results and our guidance for future periods. Adjusted EBITDA does not represent cash flows from operations as defined by generally accepted accounting principles ("GAAP”), is not a measure derived in accordance with GAAP and should not be considered by the reader as an alternative to net income (the most comparable GAAP financial measure to Adjusted EBITDA). The reconciliation of GAAP and Non-GAAP Financial Measures for the three months ended March 31, 2007 and 2006 and the three months ended December 31, 2006 is included in the above table. Management of the Company believes that Adjusted EBITDA is helpful to investors as an indicator of the current financial performance of the Company and its capacity to fund capital expenditures and working capital requirements. Due to the nature of the Company’s government programs business and revenue recognition policies and the Company’s use of stock-based employee compensation, the Company incurs significant non-cash charges for depreciation, amortization and stock compensation expense that may not be indicative of our operating performance from a cash perspective. Therefore, the Company believes that providing the measure of Adjusted EBITDA will help investors better understand the Company’s underlying financial performance and ability to generate cash flow from operations.