Digimarc CORP Q2 FY2025 earnings call

• Made progress on launching gift card solution, secured new ARR from European packaging customer for multiyear committed contract near 7 figures next year, had upsell ARR wins. - Delivered next-generation audio digital watermark. - Recognized in Gartner’s Hype Cycle and aligned with McKinsey’s digital trust trend. - Completed corporate reorganization reducing operating expenses and cash usage, on track for positive free cash flow in Q4 2025. - Focus on retail loss prevention, product authentication, digital authentication. - Contract renegotiation with a large retailer customer likely to reduce annual revenue by up to $3 million.

Ending ARR for Q2 was $15.9 million compared to $23.9 million in Q2 last year. The decrease was due to lapsed contracts. Total revenue was $8 million, down 23% from Q2 last year. Subscription revenue, accounting for 58% of total revenue, decreased 28% to $4.6 million. Service revenue decreased 15% to $3.4 million. Subscription gross profit margin was 85% (down 4 percentage points from last year), and service gross profit margin was 59% (essentially flat).

• Anticipate being free cash flow positive in Q4 2025. - Non-GAAP operating expenses expected to continue decreasing as streamlining efforts fully realize. - Have visibility into Central Bank business with at least 12-18 months forward-looking visibility. - European customer contract signed in Q2 impacts ARR with future growth potential.

• Contract renegotiation with a large retailer customer may result in reduction of up to $3 million in annual revenue. - Timing risks around revenue generation from new products, though company believes well positioned even if slip 1-2 quarters.

Q: What is the GAAP OpEx run rate at the end of the quarter?

A: Non-GAAP operating expenses were $8.9 million for the quarter, and there's still significant savings to be realized in Q3 and Q4.

Q: Do you have visibility into the Central Bank business forward year?

A: Have usually a full year of visibility, and generally have 12-18 months of forward-looking visibility as they commit to SOW a year in advance.

Q: Was the European customer contract signed in the quarter and did it impact reported ARR?

A: Yes, signed in the quarter and included in ARR, with first year reflected and future growth potential.

Q: On the gift card business, how does the mechanics work?

A: Going to market through gift card manufacturers/printers, working with gift card networks, brands, and retailers, with focus on not disrupting existing workflow.