Digimarc Reports Third Quarter Financial Results

http://www.businesswire.com/news/home/20091029006609/en

BEAVERTON, Ore.--(Business Wire)--
Digimarc Corporation (NASDAQ: DMRC) today announced financial results for the
third quarter ended September 30, 2009. Revenues for the third quarter were $4.8
million, 3% lower than combined revenues for the predecessor ("Old Digimarc")
and Digimarc operations of $4.9 million in the comparable period of 2008. The
lower revenues primarily reflect the impact of variations in scheduled payments
in certain of the Company`s long-term contracts, and to a lesser extent lower
royalties from some patent and technology licensees; offset in part by increased
project work from the consortium of Central Banks.

The third quarter net loss of $(0.7)million, or $(0.10) per fully diluted share,
included a full quarter of operating expenses as a stand-alone public company.
This compares to combined predecessor and Digimarc's net income of $0.2 million,
or pro-forma $0.03 per fully diluted share, for the third quarter of 2008, where
operating expenses benefited from proportional allocations of various
shared-services common costs of Old Digimarc.

Cash flow from operations for the third quarter totaled $(0.3) million, compared
to the combined predecessor and Digimarc`s $4.3 million for the comparable
period of 2008.

The Company`s Adjusted EBITDA in the third quarter was approximately break-even,
compared to the combined predecessor and Digimarc`s $0.3 million, or 6% of
revenues in the comparable three-month period of 2008. Digimarc calculates
Adjusted EBITDA by adjusting net income (loss) for the effects of interest,
taxes, depreciation, amortization and non-cash expenditures for stock
compensation. The reconciliation of Adjusted EBITDA to net income (loss), the
most comparable GAAP measure, is included at the end of this release.

Digimarc reported backlog at quarter end of approximately $46 million. The
Company also reported that its cash, cash equivalents and short and long-term
marketable securities at approximately $44 million on September 30, 2009, a
decrease of approximately $2 million from last quarter, reflecting investments
in the Company`s share repurchase program ($800K), Nielsen joint ventures
($550k), and capital expenditures and capitalized patent costs ($400k).

Conference Call

Digimarc will hold its third quarter earnings conference call on October 30,
2009 at 11:00 a.m. Eastern time. The call will be open to the general public and
the media, and will be broadcast live by webcast at www.digimarc.com and
www.earnings.com. The webcast may be accessed at the Company's website,
www.digimarc.com, by clicking on the "Q3 2009 Digimarc Earnings Conference Call"
webcast link on the "Events and Webcasts" page within the "Investors" section.
This webcast will be available for later listening at both sites for two weeks
following the live call. Thereafter, the webcast will be archived and available
at https://www.digimarc.com/investors/events.asp.

About Digimarc

Digimarc Corporation (NASDAQ:DMRC), based in Beaverton, Oregon, is a provider of
enabling technologies that create digital identities for all forms of media and
many everyday objects that are imperceptible to humans, but not to computers.
These technologies help computers to better process sensory data as the industry
evolves toward more intuitive pervasive computing. For more information, please
visit us at www.digimarc.com to learn more.

Forward-Looking Statements

With the exception of historical information contained in this release, the
matters described in this release contain various "forward-looking statements."
These forward-looking statements include statements identified by terminology
such as "may," "will," "should," "expects," "intends," "plans," "projects,"
"anticipates," "believes," "estimates," "predicts," "potential," "illustrate,"
"example" and "continue" or other derivations of these or other comparable
terms. These forward-looking statements are statements of management's opinion
and are subject to various assumptions, risks, uncertainties and changes in
circumstances. Actual results may vary materially from those expressed or
implied from the statements in this release as a result of changes in economic,
business and/or regulatory factors. More detailed information about risk factors
that may affect actual results is set forth in the Company's Form 10-K for the
year ended December 31, 2008 in Part I, Item 1A thereof ("Risk Factors"), Part
II, Item 7 thereof ("Management`s Discussion and Analysis of Financial Condition
and Results of Operations") under the captions "Liquidity and Capital Resources"
and "Forward Looking Statements," and in subsequent periodic reports filed with
the SEC. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date of this release. Except as required by law, Digimarc undertakes no
obligation to publicly update or revise any forward-looking statements to
reflect events or circumstances that may arise after the date of this release.

Explanation of Financial Information Presented

The financial information presented for the three- and nine-months ended
September 30, 2008 includes "carve-out" financial information from Old
Digimarc's digital watermarking business, or predecessor. It is important to
note that the financial information in the carve-out financial statements does
not include all of the expenses that would have been incurred had the
predecessor been a separate, stand-alone public entity. As such, the predecessor
financial information does not reflect the financial position, results of
operations and cash flows of Digimarc's current business, had the predecessor
operated as a separate, stand-alone public entity during the periods presented
in the carve-out financial statements. Additionally, the carve-out financial
statements include proportional allocations of various shared-services common
costs of Old Digimarc because specific identification of these expenses was not
practicable. It is expected that the initial operating costs of Digimarc on a
stand-alone basis will be higher than those allocated to the predecessor
operations under the shared services methodology applied in the carve-out
financial statements.

Digimarc Corporation
Income Statement Information
(in thousands, except per share amounts)
(Unaudited)

Three Month Information Nine Month Information
Successor / Successor /
Successor Predecessor * Successor Predecessor *
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2009 2008 2009 2008
Revenue:
Service $ 2,827 $ 2,566 $ 7,882 $ 8,101
License & subscription 1,942 2,365 5,640 7,030
Total revenue 4,769 4,931 13,522 15,131

Cost of revenue:
Service 1,499 1,417 4,396 4,409
License & subscription 42 69 158 189
Total cost of revenue 1,541 1,486 4,554 4,598

Gross profit:
Service 1,328 1,149 3,486 3,692
License & subscription 1,900 2,296 5,482 6,841
Total gross profit 3,228 3,445 8,968 10,533

Percentage of gross profit to revenues:
Service 47 % 45 % 44 % 46 %
License & subscription 98 % 97 % 97 % 97 %
Percentage of gross profit to total revenue 68 % 70 % 66 % 70 %

Operating expenses:
Sales and marketing 753 979 2,226 2,318
Research and development 1,191 1,019 3,679 2,851
General and administrative 1,566 1,374 4,750 3,281
Intellectual property 262 296 756 1,222
Transitional services (45 ) (196 ) (153 ) (196 )
Total operating expenses 3,727 3,472 11,258 9,476

Operating income (loss) (499 ) (27 ) (2,290 ) 1,057

Other income (expense) (185 ) 254 128 769

Provision for income taxes (3 ) - (12 ) (11 )
Net income (loss) $ (687 ) $ 227 $ (2,174 ) $ 1,815

Earnings (loss) per share:
Net income (loss) per share - basic $ (0.10 ) $ (0.30 )
Net income (loss) per share - diluted $ (0.10 ) $ (0.30 )
Weighted average shares outstanding - basic 7,134 7,150
Weighted average shares outstanding - diluted 7,134 7,150

Pro-forma earnings (loss) per share:
Net income (loss) per share - basic $ 0.03 $ 0.25
Net income (loss) per share - diluted $ 0.03 $ 0.25
Weighted average shares outstanding - basic 7,143 7,143
Weighted average shares outstanding - diluted 7,143 7,143

* The financial information presented combines the periods through August 1, 2008, referred to as "carve-out" financial information from Old Digimarc's digital watermarking business, or predecessor, with the period August 2, 2008 through September 30, 2008 for Digimarc, or successor, to arrive at quarterly and year-to-date totals for comparative purposes.

Digimarc Corporation
Balance Sheet Information
(in thousands)
(Unaudited)

Successor Successor
September 30, December 31,
2009 2008
Assets
Current assets:
Cash and cash equivalents (1) $ 10,685 $ 18,928
Short-term marketable securities (1) 30,760 21,240
Trade accounts receivable, net 3,027 3,839
Other current assets 1,001 875
Total current assets 45,473 44,882
Long-term marketable securities (1) 2,087 5,744
Property and equipment, net 1,180 1,212
Intangibles, net 1,088 456
Other assets, net 544 147
Total assets $ 50,372 $ 52,441

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other accrued liabilities $ 767 $ 937
Accrued payroll and related costs 246 42
Accrued merger related liabilities 144 386
Deferred revenue 1,716 2,418
Total current liabilities 2,873 3,783
Long-term liabilities 134 257
Total liabilities 3,007 4,040

Commitments and contingencies

Stockholders' equity:
Preferred stock 50 50
Common stock 7 7
Additional paid-in capital 49,406 48,268
Retained earnings (accumulated deficit) (2,098 ) 76
Total stockholders' equity 47,365 48,401

Total liabilities and stockholders' equity $ 50,372 $ 52,441

(1) Aggregate cash, cash equivalents, short- and long-term marketable securities was $43,532 and $45,912 at September 30, 2009 and December 31, 2008, respectively.

Digimarc Corporation
Cash Flow Information
(in thousands)
(Unaudited)

Three Month Information Nine Month Information
Successor / Successor /
Successor Predecessor * Successor Predecessor *
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2009 2008 2009 2008
Cash flows from operating activities:
Net income (loss) $ (687 ) $ 227 $ (2,174 ) $ 1,815
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 149 191 425 637
Stock-based compensation expense 629 137 1,808 914
Net loss from joint ventures 311 - 311 -
Increase (decrease) in allowance for doubtful accounts - (43 ) - (43 )
Other non-cash charges - 405 - 405
Changes in operating assets and liabilities: -
Trade and unbilled accounts receivable, net (318 ) 668 812 216
Other current assets (81 ) (176 ) (126 ) (188 )
Other assets, net 67 (73 ) (158 ) (83 )
Accounts payable and other accrued liabilities (195 ) 337 (155 ) 361
Accrued payroll and related costs 47 1,062 204 1,455
Accrued merger related costs (32 ) 1,906 (242 ) 1,906
Deferred revenue (201 ) (466 ) (714 ) (334 )
Other liabilities (30 ) 77 (87 ) 69
Net cash provided by (used in) operating activities (341 ) 4,252 (96 ) 7,130

Cash flows from investing activities:
Purchase of property and equipment (160 ) (264 ) (374 ) (823 )
Capitalized patent costs (204 ) (187 ) (651 ) (187 )
Investment in joint ventures (550 ) - (550 ) -
Sale or maturity of short-term investments 5,053 103,046 20,738 206,441
Purchase of short-term investments (3,998 ) (104,117 ) (26,601 ) (207,793 )
Net cash provided by (used in) investing activities 141 (1,522 ) (7,438 ) (2,362 )

Cash flows from financing activities:
Cash from Parent stock activity - 21,527 - 23,862
Net activity with Parent - (12,784 ) - -
Issuance of common stock 152 - 152 -
Purchase of common stock (822 ) - (822 ) -
Principal payments under capital lease obligations (31 ) - (39 ) (13,237 )
Net cash provided by (used in) financing activities (701 ) 8,743 (709 ) 10,625

Net increase (decrease) in cash and cash equivalents (2) $ (901 ) $ 11,473 $ (8,243 ) $ 15,393

* The financial information presented combines the periods through August 1, 2008, referred to as "carve-out" financial information from Old Digimarc's digital watermarking business, or predecessor, with the period August 2, 2008 through September 30, 2008 for Digimarc, or successor, to arrive at quarterly and year-to-date totals for comparative purposes.

Cash equivalents and marketable securities at beginning of period $ 45,488 $ 36,914 $ 45,912 $ 32,713
Cash equivalents and marketable securities at end of period 43,532 49,458 43,532 49,458
(2) Net increase (decrease) in cash,
cash equivalents and marketable securities $ (1,956 ) $ 12,544 $ (2,380 ) $ 16,745

Digimarc Corporation
Reconciliation of GAAP and Non-GAAP Financial Measures
Adjusted EBITDA
(in thousands)
(Unaudited)

Three Month Information Nine Month Information
Successor / Successor /
Successor Predecessor * Successor Predecessor *
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2009 2008 2009 2008
Net income (loss) $ (687 ) $ 227 $ (2,174 ) $ 1,815
Adjustments:
Provision for income taxes 3 - 12 11
Interest income, net (124 ) (271 ) (436 ) (786 )
Depreciation and amortization 149 191 425 637
Stock compensation 629 136 1,808 913
Adjusted EBITDA $ (30 ) $ 283 $ (365 ) $ 2,590

* The financial information presented combines the periods through August 1, 2008, referred to as "carve-out" financial information from Old Digimarc's digital watermarking business, or predecessor, with the period August 2, 2008 through September 30, 2008 for Digimarc, or successor, to arrive at quarterly and year-to-date totals for comparative purposes.

About Adjusted EBITDA

From time to time, we may refer to Adjusted EBITDA in our conference calls and
discussions with analysts in connection with our historical financial results
and our guidance for future periods. Adjusted EBITDA does not represent cash
flows from operations as defined by generally accepted accounting principles
("GAAP"), is not a measure derived in accordance with GAAP and should not be
considered by the reader as an alternative to net income (the most comparable
GAAP financial measure to Adjusted EBITDA). The reconciliation of GAAP and
Non-GAAP Financial Measures for the three- and nine-months ended September 30,
2009 and 2008 are included in the above table. Management of the Company
believes that Adjusted EBITDA is helpful to investors as an indicator of the
current financial performance of the Company and its capacity to fund capital
expenditures and working capital requirements. Due to the Company`s use of
stock-based employee compensation, the Company incurs significant non-cash
charges for stock compensation expense that may not be indicative of our
operating performance from a cash perspective. Therefore, the Company believes
that providing the measure of Adjusted EBITDA will help investors better
understand the Company`s underlying financial performance and ability to
generate cash flow from operations.

Digimarc Corporation
Michael McConnell
Chief Financial Officer and Treasurer
503-469-4652
mmcconnell@digimarc.com
or
RH Strategic
Michael Ann Thomas
206-264-0246
mthomas@rhstrategic.com

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