Digimarc Corporation ($DMRC)

Greetings, and welcome to Digimarc Corporation's Fourth Quarter 2025 Earnings Q&A Call. [Operator Instructions] Please note, this call is being recorded. I will now turn the conference over to Charles Beck, Chief Financial Officer of Digimarc. Sir, you may begin.

Welcome back, everyone. Charles Beck, Digimarc's CFO here, and I'm joined again by Riley McCormack, Digimarc's CEO. First off, apologies for the technical difficulties last week that was quite unexpected and unfortunate. There was an extended outage by our conference call provider ISP that caused the issue. Today's conference call is intended to be a question-and-answer forum related to our Q4, 2025 financial results and business update, including any questions anyone might have after reviewing our Gift Card investor supplemental. While we've had a chance to connect with many of you since the call, we still felt it was important to reconvene to answer any remaining questions. We do ask that questions related to our S-4 filing and annual proxy wait until the proxy is made effective by the SEC, at which point both management and the Board look forward to engaging with our shareholders to answer any questions, and gather any feedback as part of our normal proxy outreach process. Before we begin, let me remind everyone that today's discussion contains forward-looking statements that have risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Now I will open it up to Q&A.

[Operator Instructions] And our first question comes from Jeff Bernstein with Silverberg Bernstein.

For the Gift Card supplemental, lots of great information in there. I had a couple of questions on that. You show a company, STL that, I guess, prints some of the packaging elements related to the gift cards. They look like sort of a single point of potential success in the supply chain. Can you just talk about your relationship with them and how important that will be?

Jeff, thanks for the question. And yes, STL is the dominant label provider for the gift card industry and extremely well respected and thought of in the industry, and a wonderful partner to us because a lot of our solution is software base where we're putting on our watermark and we have our detection software that incorporates not just watermark detection but AI. But a lot of it is also building the Digimarc spec, what kind of labels to use, things like that. And where STL really excels is not just producing the labels, but a lot of material science knowledge and know-how. And so they're a wonderful R&D partner to us as we advance our spec. So wonderful company. As you point, a single point of opportunity, I like that phrase. Dominant share in this industry and a local organ company actually. So wonderful to have one of our neighbors as a partner in this.

Terrific. And if I could just get one follow-up. Blackhawk and InComm are in there and, I think, somewhat familiar to people in the gift card industry and other related cards. How important are those two guys? I know there are others as well, but they seem to come up a lot.

Yes. The gift card networks, and again, put all this in the investor supplement, everybody's got full transparency into what all these -- who all the players are in the ecosystem. But the networks, you're right, InComm and Blackhawk are the two largest gift card networks in the U.S. and massive globally as well. And they orchestrate the delivery of cards to retailers. So incredibly influential in the industry, have deep relationships with the brands, as well as the retailers, as well as the whole ecosystem, and two wonderful partners to us as well. We wouldn't be where we are without the two of them and wonderful partners, and very influential.

[Operator Instructions] And our next question comes from Scott Kimelman with Kimelman & Baird.

I actually thought the summary on the gift card business is very, very helpful in depth. It was great. I'm walking through the bottlenecks, right? So I know you made some press releases, and I know you said some positive things. I think you used the term like weeks. But where are we really in the firmware updates on the scanning side at point of sale?

Scott, yes, great question. Two, I guess, technological barriers that we've been working on the last couple of quarters. First is, as you mentioned, is with the scanner vendors. I think we classified it in our earnings call last week as in the prepared remarks is a greatest source of historic risk. There are 3 dominant scanner vendors in the industry, Zebra Datalogic and Honeywell, and then the fourth NCR, or white labels, different models from those 3 vendors. And as we highlighted last week, two things. One, it's been our greatest source of historic timing risk. But two is you all saw the press releases we put out with those 3 valued partners end of Q4, early Q1. And we mentioned on the call last week, it's not just what they put out a couple of months ago, it's also they're evergreening these commitments to the retailers, which are obviously very, very important customers to them as well. And as we mentioned, for the relevant models, we think we're weeks away from having this behind us. So that's on the scanner side. And the other one is the printers, which we also talked a little bit last week. Spent the time with the printing industry, making sure that there's more than enough capacity ready to print these cards. And while we haven't quantified any guidance for this year, the capacity we have on the printer side is multiples more than we're projecting this year for gift card volume. So fully understand your focus on potential bottlenecks. And on those two, we feel very good.

There are no further questions at this time. And this now concludes our question-and-answer session. Sorry, Charles, it looks like Jeff Bernstein is joining in for another question with Silverberg and Bernstein.

Yes, just a couple of other follow-ups. So can you talk a little bit about the second leak detection win and go through a little bit about that application, and how that was brought in? Did the customer come to you? Or do you have any resellers in this area as it was a direct sale?

So a couple of things. So yes, the -- we have two versions -- and thanks again for the question, Jeff. We have two versions of our Leak Detection solution. One is for web content. The other one is for discrete media. The Fortune 100 company that we've been talking about the last couple of quarters and put the press release out was for the web content. That's the one we spent a greater amount of time talking about on the call. The other win we got in Q4 was for the other version of Leak Detection for the media assets. And again, if you go to our website, you can see a greater description of all of these. That was a company that came to us. They had a problem with -- they were releasing media assets to their partners under embargo, ahead of big releases and some of those were making their way to social media before they were supposed to. And so this is a real problem they had with their business. And so excited to have them on board. And as we've said in the call, they're already seeing the tangible benefits and so look to grow that relationship over time. And I'm sorry, Jeff you had a couple of questions?

Yes, a little bit more on kind of what's the go-to-market there now then? So do you have some sales folks who are dedicated to this? Or how is that working?

Yes. So we do have people dedicated to this space. We think it's a really exciting space. There's actually a conference that some of the teams going to, I believe, on Wednesday of this week, to talk to more prospects and do demos. This is an area -- I think it's right, you talked about partners. This is an area that would be ripe for partners, right? This is our -- of our three focus areas, this is the one that lives completely in the digital domain. So it allows a lot of the benefits of more traditional SaaS software where we can have reselling partners, we could have technological integrations. This solution would be great for either security platforms, or -- well a lot of SaaS applications. There's sensitive information being shared on those applications. So this is an area that we do have a direct sales motion right now. And as we're building this out, we think partners should be a wonderful source of either both leads, as well as technological integrations and let them resell it as part of their solutions.

Great. That's terrific. And then just one on HolyGrail and just some stuff around timing there. So you've got a second countrywide deployment, I guess, happening that they're calling a commercial deployment. It kind of feels like it's still a trial. I guess, Belgium is doing flexible packaging, if I've got that right, and the solid is Germany. And there's, the sort of, 2030 banner over all this. But how should we think about this actually becoming real commercial where there's real money getting paid to Digimarc?

Yes, it's a great question. Yes. So I think the term is an end-to-end market demonstration is what the industry is calling this. And it's -- we have a truly tested technology in terms of our efficacy. What they're doing in Belgium and Germany is, again, these products are -- these are real products appearing on shelves, getting bought by consumers and working their way through the sortation and then the recycling facilities, which is what HolyGrail has done to date. And now they're going to take that output and actually create new recyclate. So they're calling it a cradle to -- birth to rebirth, I think, is the term they're using for this, and actually showing you can touch, feel, hold the actual recyclate at the other end. The timing for Belgium, the expectation, there's already a critical mass of stuff on shelves that needs to work its way through the shelves through pantries and then into the waste facility, and that's the expected timing of that critical mass sometime in Q2. Germany is a quarter behind that and expecting critical mass in Q3. And as you pointed out, there's the 2030 sunrise of the PPWR. There's a whole list of requirements that the industry is going to need to commit to or be able to successfully do in order to hit the requirements in the PPWR. And one of them is new fractions of recycling. So of all the benefits, right, we help produce a higher quality, as well as quantity of recyclate, right? So more recyclate but also higher quality of recyclate. With our deterministic, we can also do new fractions of recyclate. And that's just the tangible benefits we can bring to the plastic stream. The other real benefit that we're excited about, and we think the industry is excited about is data, right? It's because take any item, it is scanned 10x before it reaches that front-of-store scanner and then it goes dark to the world, right? Any data -- any post-purchase data is all qualitative or survey data. We provide the ability to actually get quantitative data to feed back into marketing or more and more these days, obviously, an AI engine and what learnings can a CPG, or retailer gain from having actual consumption data brought to them by the end of the life scanning. So when this leads to real commercialization, this is where we -- part of our focus strategy we talked about last year was focusing on the stuff that we think is right in front of us, but maintaining our position for things that we think will be future really, really big opportunities for us. And this is one of them. It's -- we can't make the industry move faster. All we can do is support the value that we can bring to the entire industry, and be there ready when they're ready to move forward.

Great. That's great. And then just the last one. You had a win in tax stamp authentication. Can you just talk about that application, as well as how that win came through, and what the selling motion is in that application, which seems like it would probably be a pretty big one?

Yes. So that one is through one of our partners who's taking our solution and applying it to a tax stamp solution that they're rolling out. We do have the ability -- as we talked about our -- put out a press release probably about a year ago. We do have a, I guess, for lack of a better term, a higher-grade solution. But what this company is doing is they produce tax stamps as it is. And so they have a whole solution that has multiple layers, and they're using us as not a stand-alone solution for tax stamps, but as a layer -- security layer in their tax stamp solution. So we have an option we could sell directly that is a lot higher -- that has a lot more capabilities and features than our traditional anticounterfeiting solution. But this specific win was through a partner who just wanted our more off-the-shelf offering as a security layer in their total solution.

This now concludes our question-and-answer session. I would like to turn the call over to Riley for closing comments.

Great. Well, thank you all again. As Charles said, we apologize for the technical snafu last week. And I know we've had a chance to talk to a lot of you in the intervening time, but I appreciate you all dialing in and rejoining us today for the Q&A session. We hope you have a great rest of your day. Thanks a lot.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.