Digimarc Corporation (DMRC) Earnings Call Transcript & Summary

Good day, everyone, and thanks for joining our Q3 earnings call. Charles Beck here, Digimarc's CFO, and with me today is Paul Carreiro, our CEO at Digimarc. Paul will give a business update during this call, and afterward I'll go over the financial results for Q3 2026. A question and answer forum will follow that. Before we get started, I want to remind all of you that this discussion today includes forward-looking statements, which carry risks and uncertainties. For more detail on the specific risk factors that might cause actual results to differ materially, please refer to our press release. Paul, at this point I'll hand the call over to you.

Appreciate that, Charles, and good afternoon to all of you. I trust the drop in the outlook hasn't caused too many headaches on your end. This is my second earnings call since becoming Digimarc's CEO, and it's my first full quarter leading the company. On our last call, I laid out where I believed our focus had to go: tighter priorities, better commercial execution, and more operating discipline. Over this quarter, we've concentrated on getting those efforts underway. The progress has been tremendous, though I'll admit we're still learning as we go. In the end, the thing that matters most is that we're beginning to see movement in orders from new customers; we've gotten extra secure gift card orders from big retailers earlier than we expected, and we now have over 68 retailers involved, compared with just one when the year began. We also secured a notable CPG win with a major European customer that's worth more than $1.1 million yearly, and fresh as well as added opportunities are opening up in that sector. These initial results are very encouraging. Our job is to turn this new demand into actual deployments, recurring revenue, and a business that's more predictable. The theme today is straightforward: we're tightening our focus so we can move faster. Having now completed my first full quarter as CEO, my conviction has only grown that Digimarc holds the technology, the relevance to customers, and the product-market fit required to become a much larger and far stronger business. The real opportunity is in pairing those strengths with the commercial organization and operating rhythm they deserve. We have already tightened our executive reporting cadence and the discipline behind how we run the business; as a result, we now see customer activity, sales execution, pipeline activity, and the decisions this new data requires us to make with much greater clarity. Our secure gift card program is advancing tremendously and is transitioning out of validation into staged retailer rollouts. Based on what you've already seen in our recent social media updates, Kroger has launched its first five-store rollout, with a fast expansion to follow in Q1, and our CPG authentication business is picking up momentum—especially with global customers that have substantial anti-counterfeiting requirements, which I'll get into more shortly. We keep bringing on additional experience, commercial, and partner leadership, and at the same time we're expanding account executive capacity so we can capitalize on the opportunities taking shape across retail, CPG, and emerging government business. Let me be direct about where additional effort is needed. My expectations for visibility into 2027 bookings and revenue aren't met yet. Elevating pipeline quality and tightening forecast discipline stays a top priority. The foundations are stronger. The goal at this point is to make that strong momentum something we can reproduce consistently. A key choice we made involved streamlining our approach to the market. Instead of stretching our direct resources across too many areas, we are zeroing in on retail and consumer packaged goods, since that is where we stand apart most clearly and where commercial openings are closest at hand. Opportunities with central banks and federal agencies remain important to us, and we will pursue them using appropriate coverage and partners. We have added senior leaders across sales, marketing, revenue operations, and partners and alliances, and those appointments establish clearer accountability and discipline regarding quota, pipeline, forecast, operations data, and partner engagement. Our senior commercial framework is mostly established, and we continue to reinforce it. The next step is bringing on additional sales talent across North America and Europe, which will help us convert opportunity into repeatable business. Expanding account executive capacity in retail and CPG remains both our immediate focus and an ongoing one, paired with more disciplined account planning and backed by robust coverage of three times qualified pipeline. Our sales teams are coming along well, and we engage customers through a consistent 360-degree approach. We aren't pursuing growth by spending indiscriminately; instead, we direct resources to wherever the strongest potential return exists in the shortest time with the least risk. I want to offer some guidance on what to expect from us in the coming quarters. Retail continues to advance impressively — Schnucks, and now 165 stores at Stater Bros. Both are now fully operational. Results are beating what we anticipated. Kroger kicked off its initial five-store rollout in October, and Food City KVAT is likewise starting store-wide rollouts across North America. We anticipate that at least one additional large retailer will launch its program before the year is out. Looking ahead to the first quarter of 2027, our target is a 500-store expansion at Kroger, along with over 1,000 stores planned through other retailer deployments. Retailers elsewhere in the United States, Canada, Australia, and Europe are likewise actively discussing pilot roles and broader deployments. We expect the related revenue contribution to ramp up quickly throughout 2027 as those deployments advance and additional participants join. Within consumer packaged goods, we're broadening authentication initiatives with both new and current clients — among them a campaign against counterfeiting for tobacco, aimed at helping fight this worldwide issue, which also impacts tax income collected by countries. Partners remain, and will keep being, essential to what we achieve, and we're growing our partner network throughout Europe and Asia as well as building demand through our direct teams across the installed base, especially in North America and Europe. Across both markets, we continue to bring in experience, selling capacity, data-centric revenue operation programs, and reporting programs so we maintain a disciplined approach in how we keep engaging customers and the wider market. These milestones will prove essential to what we achieve, and we'll continue reporting on our progress over the quarters ahead. The commercial go-to-market approach we're implementing is pretty simple: we have dedicated industry teams covering retail and CPG, which gives us clear commercial ownership and focus, and at the same time we keep leveraging our global partners in both of those sectors — that lets us significantly extend our direct reach and also strengthen our moat, especially in retail. The early signals are quite encouraging, with retailer engagement now above 68 across North America and Europe. Beyond that, CPG has proven to be a robust sector for our business, and a recent win with a large European CPG customer should generate over $1.1 million in ongoing yearly revenue from just 2 of that customer's 24 regions. During the remainder of Q4 and across the first half of 2027, our plan is to continue growing and developing the dedicated teams we have for retail and CPG, along with a federal capability, all of which builds on the strong work already happening with the Global Central Bank Group. One important measure of success for us will be putting in place and managing 3x pipeline coverage as a practical discipline. Since leadership is mostly in place and our go-to-market commercial teams are still expanding, an immediate and continuing priority is ensuring those teams connect quickly with one of our most vital assets, our install-base customers. We strongly believe there is meaningful short- to mid-term revenue potential within this group, which has had only limited engagement so far, and that has also affected our customer retention. Through this approach to engagement, I anticipate the customer journey will improve. Among the growth paths open to us, this ranks as one of the most appealing and lowest-risk. Our commercial emphasis won't come at the cost of ongoing innovation.

So really, what we're doing is speeding up innovation by connecting it straight to the problems customers need solved right now and the requirements they foresee ahead in retail and CPG. On the retail side, our AI-optimized secure gift card software runs on scanners made by Zebra, Datalogic, and Honeywell, and it's deployed at several retailers, with more opportunities in the pipeline. We're rolling out new AI models to reinforce that protection and make our solution tougher to copy. In CPG, authentication of products, packaging, and detection is a major issue across several CPG segments, including tobacco, nutraceuticals, and pharma, where secure packaging is essential to cut down on counterfeiting, as I mentioned earlier. Our application suite remains built on the Digimarc Illuminate platform. That platform handles over 6 billion serials and identifiers. Roughly 1.5 million serialized requests come in each day, and after the recent upgrade of our legacy platform, our hardware and operating support costs dropped by more than 50%, which lets us boost customer throughput quickly at negligible cost. Naturally, we keep drawing on multiple AI and data platforms to help speed customer migration and product development. When we test a product investment, the question is whether it solves clearly defined customer problems that can be applied across the broader industry at volume with measurable economic value. That discipline will keep shaping our roadmap. A bit more on our retail secure gift card program: that program remains the anchor of our business and is a solid example of how strategy is now turning into action. As I've said many times before, Schnucks is live in all 115 stores with both closed- and open-loop cards, at 100% activation and with no reported fraud incidents in that deployment so far. That's an amazing result. We also recently finished the 165-store rollout of multiple branded cards at Stater Bros. We now have over 500,000 cards in stores, and our retailer pipeline has grown significantly since the year began, and we don't expect that pipeline growth to slow. Kroger's first five stores started rolling out in October, and we now have four active pilots and production ramp-ups in Q4. We've also seen additional gift card orders speed up sooner than expected and believe a few more retailer orders will come in Q4. Looking ahead, we're targeting the next phase of the program and broader deployments at other retailers, exceeding 1,000 stores across retailers in the first half of 2027, with more programs expected to follow. None of this happens through Digimarc alone. Card networks, scanner manufacturers, production suppliers, and packaging partners all play an important role. Scanner software availability and retailer scheduling are still dependencies, and we're working through them successfully directly with those partners; we're encouraged by the progress, since it's grounded in store rollouts and real orders. The specific rollout plans are now tightly managed and controlled. Charles, back to you for the financial results.

We finished Q3 with ARR of $10.8 million, versus $15.8 million at the same point last year. That shift mainly comes from two events we'd already disclosed: a $3.1 million contract that expired in October 2025, and a $2.6 million reduction to a contract in June 2026. As Paul noted earlier, we just closed the new CPG contract, which should add $1.1 million of ARR growth. That deal was signed during the fourth quarter, so it isn't captured in the ARR figure I just gave. Our main priority now is speeding up ARR growth by bolstering our go-to-market team, honing our industry focus, tightening operating discipline, and executing better. Q3 total revenue came in at $6.4 million, versus $7.6 million in last year's Q3. Subscription revenue was $3.2 million, making up 49% of total revenue for the quarter, compared with $4.6 million a year earlier. The two customer contracts I pointed to on the prior slide explain that entire difference. Service revenue for the quarter was $3.3 million, versus $3.1 million last year. That rise came from higher service revenue tied to a commercial customer. Subscription gross profit margin reached 87% in the quarter, one percentage point above last year's Q3. The gain mainly came from lower subscription platform costs, which fell by EUR 200,000 year-over-year. Service gross profit margin was 60% for the quarter, 3 percentage points higher than in last year's Q3. That improvement was largely driven by a favorable mix of service revenue. Operating expenses totaled $11.5 million for the quarter, a drop of $1.3 million, or 10%, from $12.8 million in Q3 last year. The decline mainly reflects $700,000 less in stock compensation expense and $500,000 less in bad debt expense. Non-GAAP operating expenses, which leave out non-cash and non-recurring items, came to $8 million for the quarter, down $600,000, or 7%, from $8.6 million in last year's Q3. That decrease is mostly due to $500,000 lower bad debt expense. Net loss per diluted share was $0.36 for the quarter, versus $0.38 in Q3 last year. Non-GAAP net loss per diluted share came in at $0.13 for the quarter, compared with $0.10 a year ago. We closed the quarter holding $22.1 million in cash and short-term investments, with no debt. In the quarter, we brought in $18.2 million of gross proceeds through the previously announced Registered Direct Offering, and we incurred $1.3 million in commissions and legal fees tied to the financing, $200,000 of which was paid during the third quarter. Free cash flow used in the quarter was $4.3 million, versus $3.1 million in Q3 last year. That free cash flow usage stemmed from the timing of payables connected to the corporate reorganization and CEO transition costs. We also spent $400,000 during the quarter to repurchase shares under our employee equity programs. For more detail on our financial results and the risks and opportunities our business faces, please see our Form 10-Q, which we'll file with the SEC shortly. Back to you, Paul, for closing remarks.

I want to wrap up by expressing appreciation to our employees, our customers, our partners, and naturally the investor community for the backing and patience they have shown. Progress comes down to a substantial amount of concentrated effort throughout the whole company. We moved fast: we strengthened leadership, we concentrated and sharpened where our commercial resources go, we locked in new orders ahead of schedule, we pushed retailer deployments forward, and we introduced greater execution discipline into the way we run things. That progress makes me proud, though I am not mistaking early momentum for the results we ultimately have to deliver over the long term. Across the quarters ahead, hold us to what actually counts: sales capacity going live, pilots turning into active deployments, growth coming from our CPG business and from install-base customers, and forecast visibility that keeps improving steadily; we will invest with prudence and stay accountable for execution. Having watched our early plans come together, I am even more confident today than I was on my first call. The rebuild is underway, and the results are starting to show. Thank you. Operator, please open up the call for questions.

Yeah, thank you for fielding these. So you attended the RGCA event—the Retail Gift Card Association gathering, as I understand it, in late October—and while there you emphasized how much market interest your gift card security offering is drawing. I'd love more detail on the discussions you had during that event and what the pipeline looks like as a result. Also, are more retailers shifting from evaluation into pilots? And what's your view on the deployment trajectory?

Yeah, those are excellent questions, Joshua. Appreciate you raising that. There's quite a bit to unpack in there, so let me attempt to address all of it. That event left us very impressed. We’d describe it as a small- to mid-size event, I’d say, though the people there represented quite a wide spread of retailers from North America and other parts of the world too—everything from mid-sized retailers to a few of the biggest global retailers. What we heard back was very favorable, and it came mainly in the form of a conversation about the rollout strategy each of them had for their own gift card programs; it also gave us a clearer picture of the buying personas within some of those organizations. A major advantage our team gained from attending that event was the chance to meet some of the buyers and decision-makers who run these programs at the large retailers, which opened doors for us to discuss our technology further and help them feel at ease about launching programs. As you'd expect, and as you saw us mention and post about a few times, we saw strong activity and our pipeline expanded. I don't have the precise figures, but coming out of the event our pipeline grew substantially, along with follow-up opportunities.