Digimarc CORP Q1 FY2025 earnings call

• Narrowed focus to three opportunity sets: retail loss prevention, physical authentication, and digital authentication.
• Retail loss prevention: First gift cards protected with solution to appear in next month; working on PLU fraud with initial customer featured on podcast.
• Physical authentication: Expect to sign fifth deal with Digimarc Validate customer; formed partnership with supplier to loyalty and reward customers.
• Digital authentication: Likely to exceed conservative assumptions for 2025 ARR; growing relationship with Fortune 100 customer and starting conversations with others.
• Other opportunities: Selected by Unilever as digital link vendor; won deal with large CPG for digital product passport; supported The Alliance to End Plastic Waste and AIM on Digimarc Recycle; expect to announce win with US government division.

Total revenue was $9.4 million, a decrease of $600,000 or 6% from $9.9 million in Q1 last year. Subscription revenue, accounting for 57% of total revenue, was $5.3 million, down 8% from $5.8 million. Service revenue was $4.1 million, down 3% from $4.2 million. Subscription gross profit margin was 86% for the quarter, down 1 percentage point from Q1 last year. Service gross profit margin was 65% for the quarter, up 9 percentage points from Q1 last year.

• Expect higher cash flow usage in Q2 due to external matter causing higher legal and PR costs.
• Goal to be free cash flow positive by Q4 this year.
• Gift cards expected to be a significant driver of 2025 ARR growth.

• Higher legal and public relations costs due to an external matter that arose near the end of March, running upwards of $0.5 million per month.

Q: Maybe just starting off on the gift card opportunity. How are you thinking about the potential for revenue and ARR to actually hit the model in 2025 from the gift card opportunities?

A: Josh, on the revenue impact, we expect gift cards to be a significant driver of our 2025 ARR growth. The reception from the industry is astounding as it's a real issue for the trillion-dollar global gift card industry.

Q: As you look at a couple of those price sensitive renewals that you highlighted in the shareholder letter, are those actually having an impact on ARR growth here in Q1 and Q2 that is enough to actually call out?

A: We were highlighting trends in the industry. These price sensitive renewals did have some impact on Q1 and likely will in Q2, but not material enough to call out specifically as we don't break down ARR in detail.

Q: First on ARR and the trajectory, can you give us any sense of how you are thinking about ARR trajectory going into the end of the year?

A: We don't give specific guidance, but our focus is to get to non-GAAP profitable no later than Q4. Gift cards are expected to be a significant driver to 2025 ARR.

Q: In terms of gift card pricing while you're on that, can you just give us a refresher? How should people size the gift card TAM based on how the current contracts are being priced?

A: Nothing has changed in our pricing. We are pricing to buy the market, have a product roadmap of new features, and are already discussing opening other large geographies for gift card opportunities.

Q: You're narrowing the portfolio from several products and obviously with reduced R&D and other support for those other products and then obviously in combination with the comments you made around increased churn there. Can you give a crude sense of what percent of ARR right now is from the three go-forward products?

A: We just don't quantify the composition of ARR in that respect.