Digimarc Reports Fourth Quarter and Fiscal Year 2007 Financial Results

Digimarc Corporation (NASDAQ:DMRC) today announced financial results for the fourth quarter and year ended December 31, 2007, reporting its second consecutive profitable quarter and significant gains in profitability and cash flow for the year. Fourth quarter revenues totaled $28.4 million, 12% higher than revenues of $25.4 million in the comparable period of 2006. Fourth quarter net income of $0.3 million, or $0.01 per fully diluted share, improved more than $1.2 million from the net loss of $(0.9) million, or $(0.04) per fully diluted share, for the same period a year earlier. Digimarc’s total revenue for the fiscal year ended December 31, 2007 was $109.8 million, 5% higher than the $104.2 million reported for the prior year. The Company substantially reduced its net loss for the year to $(0.4) million, or fully diluted net loss per share of $(0.02), an improvement of more than $11 million, or $0.55 per fully diluted share, as compared to $(0.57) fully diluted net loss per share in 2006. Operating expenses for 2007 were $43.4 million, 11% lower than in the prior year. Fourth quarter operating expenses totaled $10.5 million, 4% lower than incurred in the same period a year earlier. Cash flow from operations for 2007 was $16.3 million, a $7 million improvement from 2006. The improvement in cash flow from operations was primarily due to improved productivity and efficiency. Adjusted EBITDA for the fourth quarter improved by more than $2.3 million, to $5.7 million from $3.4 million in the corresponding quarter of 2006. For the year, Adjusted EBITDA improved by more than $13.2 million, to $18.9 million from $5.7 million in 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. Recent Business Highlights Digimarc System Enables State of Washington to Issue the First Enhanced Driver Licenses in North America Nevada Approves $29 Million Contract Extension with Digimarc for Highly Secure Driver License System Nielsen and Digimarc Launch Service to Identify and Manage Internet Distribution of Media Content Digimarc Teams with BD-BrandProtect for Enhanced Image Search and Digital Watermarking Capabilities IEEE Spectrum Survey Ranks Digimarc High on List of World’s Most Influential Patents for Second Year in a Row Digimarc Expands Territory for Mobile Print-to-Web Solutions with License to AquaMobile See Digimarc’s website at www.digimarc.com for further details. Conference Call Digimarc will hold its fourth quarter and fiscal year 2007 earnings conference call on Friday, Feb. 29, at 7:30 a.m. PT / 10:30 a.m. ET. The call will be open to the general public and the media, and will be broadcast live by webcast at www.digimarc.com and www.earnings.com. At Digimarc’s web address, the call will be available by clicking the "Q4-FY 2007 Earnings Release Conference Call” webcast link on the "Investor Events” page within the "Investors” section. This webcast will also be available for later listening at both sites for two weeks following the live call. Thereafter, the webcast will be archived and available at http://www.digimarc.com/investors/call_archive.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 360 issued U.S. patents with more than 7,500 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 regarding the approximate amounts of awarded contracts and 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 Twelve Months Ended December 31, December 31, December 31, December 31, 2007 2006 2007 2006 Revenue: Service $ 22,161 $ 20,458 $ 89,623 $ 85,681 Product and subscription   6,261     4,956     20,141     18,566   Total revenue 28,422 25,414 109,764 104,247   Cost of Revenue: Service 14,977 13,578 59,941 60,817 Product and subscription   2,792     2,147     8,087     7,952   Total cost of revenue 17,769 15,725 68,028 68,769   Gross Profit: Service 7,184 6,880 29,682 24,864 Product and subscription   3,469     2,809     12,054     10,614   Total gross profit 10,653 9,689 41,736 35,478   Percentage of gross profit to revenues: Service 32 % 34 % 33 % 29 % Product and subscription 55 % 57 % 60 % 57 % Percentage of total gross profit to total revenues 37 % 38 % 38 % 34 %   Operating expenses: Sales and marketing 3,870 3,691 16,615 16,355 Research, development and engineering 1,707 1,881 7,323 10,269 General and administrative 3,978 4,418 15,609 17,484 Amortization of intangibles 532 511 1,992 2,171 Intellectual property 432 402 1,836 1,774 Restructuring charges, net   -     -     -     547   Total operating expenses   10,519     10,903     43,375     48,600     Operating income (loss) 134 (1,214 ) (1,639 ) (13,122 )   Other income (expense), net   455     386     1,705     1,587   Income (loss) before provision for income taxes 589 (828 ) 66 (11,535 ) (Provision) benefit for income taxes   (289 )   (84 )   (511 )   (205 ) Net income (loss) $ 300   $ (912 ) $ (445 ) $ (11,740 )   Net income (loss) per share - basic $ 0.01 $ (0.04 ) $ (0.02 ) $ (0.57 ) Net income (loss) per share - diluted $ 0.01 $ (0.04 ) $ (0.02 ) $ (0.57 )   Weighted average shares - basic 21,036 20,692 20,982 20,649 Weighted average shares - diluted 21,156 20,692 20,982 20,649 Digimarc Corporation     Cost of Revenue (in thousands) (Unaudited)       Three Months Ended Twelve Months Ended December 31, December 31, December 31, December 31, 2007 2006 2007 2006 Cost of Revenue: Variable $ 8,624 $ 7,079 $ 31,281 $ 29,145 Fixed field support and manufacturing 5,917 5,880 25,044 28,972 Program depreciation   3,228   2,766   11,703   10,652 Total cost of revenue $ 17,769 $ 15,725 $ 68,028 $ 68,769     Cost of Revenue (as a % of total revenue): Variable 30% 28% 28% 28% Fixed field support and manufacturing 21% 23% 23% 28% Program depreciation   11%   11%   11%   10% Total cost of revenue   62%   62%   62%   66% Digimarc Corporation Balance Sheet Information (in thousands) (Unaudited)       December 31, December 31, 2007 2006 Assets Current assets: Cash and cash equivalents $ 19,582 $ 23,135 Restricted cash 205 378 Short-term investments   3,568   - Total cash, cash equivalents and investments 23,355 23,513 Trade accounts receivable, net 18,498 14,403 Inventory, net 7,316 6,600 Other current assets   2,628   2,273 Total current assets 51,797 46,789   Restricted cash 9,358 9,560 Property and equipment, net 66,277 61,898 Intangibles, net 13,462 15,374 Other assets, net   1,129   1,010 Total assets $ 142,023 $ 134,631     Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 6,092 $ 5,708 Accrued payroll and related costs 1,952 3,894 Deferred revenue 6,239 5,050 Other current liabilities   1,955   2,258 Total current liabilities 16,238 16,910   Long-term deferred revenue, net of current 7,007 5,345 Other long-term liabilities   1,455   885 Total liabilities 24,700 23,140   Stockholders' equity   117,323   111,491 Total liabilities and stockholders' equity $ 142,023 $ 134,631 Digimarc Corporation     Cash Flow Information (in thousands) (Unaudited)       Three Months Ended Twelve Months Ended December 31, December 31, December 31, December 31, 2007 2006 2007 2006 Cash flows from operating activities: Net income (loss) $ 300 $ (912 ) $ (445 ) $ (11,740 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 3,845 3,385 14,327 13,320 Amortization of intangibles 532 511 1,992 2,171 Stock-based compensation expense 1,038 730 3,945 3,013 Change in allowance for doubtful accounts - 18 1 (155 ) Other non-cash charges 245 (117 ) 221 (403 ) Changes in operating assets and liabilities: Restricted cash - - 375 (2,659 ) Trade accounts receivable, net (4,131 ) 551 (4,136 ) 1,449 Inventory, net (1,324 ) (584 ) (716 ) 851 Other current assets 75 (210 ) (355 ) 555 Other assets, net 130 (102 ) (119 ) (1 ) Accounts payable 2,001 913 384 (1,014 ) Accrued payroll and related costs (73 ) (201 ) (1,942 ) 163 Deferred revenue 644 1,240 2,851 3,586 Other liabilities   (317 )   418     (50 )   182   Net cash provided by (used in) operating activities 2,965 5,640 16,333 9,318   Cash flows from investing activities: Purchase of property and equipment, including capitalized labor costs, and intangibles (2,807 ) (3,536 ) (17,749 ) (10,506 ) Sale or maturity of short-term investments 45,491 44,596 150,775 136,946 Purchase of short-term investments   (45,301 )   (43,595 )   (154,343 )   (136,207 ) Net cash provided by (used in) investing activities (2,617 ) (2,535 ) (21,317 ) (9,767 )   Cash flows from financing activities: Issuance of common stock 481 129 2,544 450 Purchase of common stock (216 ) (208 ) (357 ) (208 ) Principal payments under capital lease obligations   (264 )   (142 )   (756 )   (622 ) Net cash provided by (used in) financing activities 1 (221 ) 1,431 (380 )         Net increase (decrease) in cash and cash equivalents $ 349   $ 2,884   $ (3,553 ) $ (829 )     Supplemental disclosure of cash flow information: Cash paid for interest $ 79 $ 20 $ 135 $ 93 Cash paid for income taxes $ 51 $ 45 $ 514 $ 179 Supplemental disclosure of cash flow information: Equipment acquired or exchanged under capital lease obligations $ 102 $ - $ 1,276 $ 582 Digimarc Corporation Reconciliation of GAAP and Non-GAAP Financial Measures Adjusted EBITDA (in thousands) (Unaudited)         Three Months Ended Twelve Months Ended December 31, December 31, December 31, December 31, 2007 2006 2007 2006   Net income (loss) $ 300 $ (912 ) $ (445 ) $ (11,740 ) Adjustments: Provision for taxes 289 84 511 205 Interest income, net (313 ) (363 ) (1,409 ) (1,298 ) Depreciation 3,845 3,385 14,327 13,320 Amortization of intangibles 532 511 1,992 2,171 Stock compensation   1,038     730     3,945     3,013   Adjusted EBITDA $ 5,691   $ 3,435   $ 18,921   $ 5,671         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- and twelve-months ended December 31, 2007 and 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.