Digimarc Corporation (NASDAQ:DMRC) Q2 2020 Earnings Conference Call - Final Transcript

Jul 30, 2020 • 05:00 pm ET

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Digimarc Corporation (NASDAQ:DMRC) Q2 2020 Earnings Conference Call - Final Transcript

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Presentation
Executive
Charles Beck

two notable developments. First, we generated our first two bookings for solutions using our variable data printing software, one for a traceability use case and the other for a brand authentication use case. While these two bookings contributed only tens of thousands to our reported Q2 bookings, we anticipate they will become larger contributors to bookings in the second half of this year and thereafter. Both opportunities include variable fees to us based on units produced versus an upfront fixed fee, which mitigates amounts included in bookings. These are partner-led initiatives, whereby charging per unit is preferred to align our cost with their existing business models. I anticipate we will see more opportunities like these in the coming quarters as our business partners are becoming more engaged in selling Digimarc-enabled solutions. These two use cases are also repeatable amongst a large base of prospective customers.

Second, we closed our first four paid contracts for recycling use cases during the quarter. Two of the contracts provided for enhancement of product packaging, one for consulting on optimizing the reading environment for plastic sortation and the other on enhancing plastic packaging molds with Digimarc Barcode. The bookings impact of these four contracts to Q2 was not significant, as the fees are variable or dependent upon meeting milestones, but we anticipate they will grow in significance going forward. These contracts, along with other opportunities we are seeing in the sales pipeline, are encouraging signs of real interest in investing in recycling use cases.

Gross margin for the quarter was 67%, up from 65% last year, largely driven by an increase in service margins. Service margins were 59%, up from 53% last year, primarily due to a favorable mix in billable expenses with higher labor and lower non-labor expenses. Labor expenses have a much higher margin than non-labor expenses in our service contracts. Subscription margin was unchanged at 80%.

Operating expenses were $11.9 million, a decrease of 2% from Q2 last year, mainly due to lower travel, consulting and marketing costs. Operating expenses were down sequentially from last quarter, dropping $1.1 million, as we successfully executed the cost-cutting measures that we shared with you on the last earnings call. Expenses ended up even lower than the $12 million to $12.5 million range we guided to as we identified additional expense reduction opportunities in nonessential areas.

We are further decreasing spending by virtue of some corporate restructuring that is underway, to improve our execution of strategy. These changes will further reduce our operating expenses by reducing headcount by approximately 7%. We expect to incur severance costs of $900,000 during Q3, consisting of $400,000 of cash-based severance and $500,000 of stock-based severance. Annual operating costs are expected to decrease $2.3 million as a result of these reductions, consisting of $2.1 million of cash-based compensation and $200,000 of stock-based compensation.

We anticipate operating expenses in the third quarter to be between $12.2 million and $12.6 million, which includes the $900,000 of nonrecurring severance costs I just mentioned. We