Digimarc CORP Q1 FY2026 earnings call

Strategic Focus Areas

• Digimar's core focus areas are retail loss prevention, product authentication, and digital trust and integrity, supported by seven distinct solutions. The company selectively pursues low-distraction revenue opportunities outside these focus areas that advance long-term strategic positioning.

Retail Loss Prevention (Secure Gift Card Solution)

• Achieved a key milestone in Q1 2026 by closing the first commercial order for the secure gift card solution, totaling $500,000 in ARR across 6 closed-loop and open-loop brands.
• Initial rollout plans are now advancing with 15 North American retailers, including 8 of the 20 largest North American retailers by sales, a material increase from 8 total retailers and 4 of the top 20 two months prior.
• The full-store rollout at Schnucks is underway, with the retailer reporting positive early feedback from in-store testing. A second retailer's full 600-location rollout was pushed from summer 2026 to January 2027 due to delays from a scanner vendor's firmware release, not Digimar's software; the retailer's commitment to the solution remains unchanged, and the updated firmware is now undergoing acceptance testing.
• Industry engagement has grown significantly, with retailers, brands, and gift card networks proactively coordinating to speed adoption of the solution, which addresses widespread fraud that threatens retail gift card programs. The solution delivers significant fraud reduction, improves the checkout experience, and scales across printers, brands, and retailers without reducing sales.
• Digimar's strategy uses secure gift card adoption to build a technological footprint across storefront scanners and establish internal customer relationships, creating cross-sell opportunities for other retail solutions; early interest has already been expressed in the company's product swap prevention and new counterfeit coupon solutions.

Product Authentication (Anti-Counterfeiting Solution)

• VigiMark's anti-counterfeiting solution addresses growing counterfeiting and IP theft risks, which have been amplified by AI-generated replica packaging and decentralized supply chains, and outperforms legacy analog alternatives.
• Closed three upsell deals with existing customers in Q1 2026 across pharmaceuticals, food and beverage, and consumer goods, demonstrating cross-vertical applicability. Digimar notes that solving core customer problems drives long-term upsell and cross-sell revenue growth.

Digital Trust and Integrity

• AI has amplified existing digital trust challenges and created new unmet needs, and Digimar's position as a co-leader of the C2PA standard's digital watermarking component positions the company to capture this large greenfield market opportunity.
• Secured a six-figure upsell with a global technology customer for a web content leak detection solution. Advanced discussions with a major industry trade group for an industry-wide trust solution, and will soon begin direct talks with leading firms in the sector.
• Progressing a new extension of the company's trust layer strategy that addresses the unmet need for scalable verification for autonomous agentic AI. As AI agents operate without human review, existing security architectures built around human involvement are no longer sufficient, and Digimar's existing intellectual property positions it uniquely to solve this problem.
• Selected as a potential participant in the U.S. SoftWorks Field 4 technology sprint, demonstrating the relevance of Digimar's technology for mission-critical use cases.

Other Operational Updates

• Belgian and German market demonstrations for Digimar's plastic recycling sorting solution remain on track; results are expected to prove the solution can produce new high-value recycled plastic feedstock fractions, enabling compliance with the EU's upcoming Packaging and Packaging Waste Regulation (PPWR). Two upsell deals with existing Engage recycling customers have been closed, one in Q1 and one already in Q2 2026.
• Added two experienced sales leaders to expand go-to-market capabilities, and expects to finalize its new shareholder-approved corporate structure by May 16, 2026. Ended Q1 with $10 million cash and no debt.

Total Q1 2026 revenue was $7.6 million, down from $9.4 million in Q1 2025. Subscription revenue, which contributed 58% of total revenue, was $4.4 million, down $900,000 year-over-year; excluding the loss of two 2025 customer contracts that contributed $1.5 million in Q1 2025 subscription revenue, subscription revenue grew $600,000 year-over-year. Service revenue was $3.2 million, down $800,000 year-over-year, due to the absence of $500,000 in Holy Grail 2.0 recycling project revenue that was recorded in Q1 2025. Ending annual recurring revenue (ARR) was $15 million, down from $20 million in Q1 2025; excluding the lost $6.8 million in ARR from the two 2025 contracts, ARR grew $1.8 million year-over-year, with $500,000 of that growth coming from the new secure gift card solution. ARR grew 9% sequentially quarter-over-quarter. Subscription gross margin was 90%, up 400 basis points (4 percentage points) year-over-year, driven by lower platform costs that are down $300,000 year-over-year. Service gross margin was 57%, down 8 percentage points year-over-year, due to an abnormally favorable cost/revenue mix in Q1 2025, which aligned with the service margin's historical range in the high 50s. Operating expenses were $11.7 million, down 36% ($6.5 million) year-over-year. Non-GAAP operating expenses were $8.1 million, down 51% ($8.4 million) year-over-year. Net loss per diluted share was $0.32, down from $0.55 in Q1 2025; non-GAAP net loss per diluted share was $0.07, down from $0.40 in Q1 2025. Digimar ended the quarter with $10 million in cash and investments and no debt, with approximately $2 million in free cash flow usage in the quarter. By business segment: 1) Secure Gift Card (Retail Loss Prevention): ARR from the segment reached $500,000 in Q1 2026 from Digimar's first commercial order; 2) Anti-Counterfeiting (Product Authentication): ARR continues to grow, driven by upsells and new customer wins; 3) Digital Trust and Integrity: Generated a six-figure upsell with an existing customer in Q1 2026.

• Digimar maintains its expectation of delivering significant full-year 2026 ARR growth, but has revised the expected composition of that growth. Due to the scanner vendor-caused delay to secure gift card rollouts, the segment is no longer expected to be the largest contributor to 2026 ARR growth. Management emphasizes this is purely a timing change, not a reduction in conviction for the long-term secure gift card opportunity, which has seen strong growing market demand and industry engagement.

• All forward-looking statements related to product adoption, growth, and new market opportunities are subject to known and unknown risks that could cause actual results to differ materially from expectations.
• The timing of secure gift card rollouts remains dependent on third-party scanner vendors delivering compatible general availability firmware, a risk that caused a delay to one major retailer's full rollout in 2026.
• Digimar operates in emerging market segments (including agentic AI verification and digital trust) that carry unproven market demand and competitive uncertainty.

Q: Daniel Ahn asked for clarity on the 15 North American retailers named as advancing rollout plans: what stage of the sales process are they in, and what is the breakdown of their progress? / A: Riley McCormick explained the 15 retailers are all at varying stages of active rollout planning, ranging from early planning to weekly execution calls, on-site visits, and limited in-store testing. Digimar is also hosting cross-industry events to bring retailers and brands together to coordinate faster adoption, and is engaged with many more prospects beyond these 15.

Q: Ahn asked what common drivers are behind the three recent upsells for Digimar's anti-counterfeiting solution. / A: McCormick stated the upsells come from a mix of common expansion activities: some customers added new brands to their deployment, some expanded into new geographic regions, and others added new functionality to their existing implementation.

Q: Ahn asked for an update on the pacing of the Schnucks full rollout and early feedback from the partnership. / A: McCormick confirmed the rollout is currently underway, and notes Schnucks has already rolled out the secure gift cards to 15 initial stores (expanding from an original 10-store test) and is very satisfied with the solution. Digimar values Schnucks as its first core retail partner for the secure gift card program.