Digimarc Corporation Price & Performance (DMRC)

Riley McCormick, our CEO Charles Beck our CFO are with me on the call. On the call today, we provide a business update and discuss Q4 and full year 2024 financial results This will be followed by a question and answer form. We have posted our prepared remarks in the Investor Relations section of our website and will archive this webcast there. Before we begin, me remind everyone that today's discussion contains forward looking statements [indiscernible] and uncertainty. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Riley will now provide [indiscernible] Thank you, George, and hello, everyone. On our last earnings call, we stated that as a result of significant achievements in both invention and market development, the difference between what lies ahead what lies behind never been greater. That conviction was driven by our defining not just one, but two compelling paths to near term profitability while positioning ourselves to deliver dollars of free cash flow per share shortly thereafter. The first path consisted of continuing to pursue market opportunities across across both identification and authentication use cases, anchored by the closure of the large deal we discussed on the Q3 call.

While this was the path we felt was the most likely as of that call, we were clear to point out that the biggest risk to this deal's close was not the customer's interest in our offering, but how much time we'd be willing to give this customer to commit as there were many exciting developments in Q3 to which we could instead be allocating our resource The second path consisted of committing our resources to these many exciting developments. Which included not only incredible invention, such as significant breakthroughs in the area of copy detection, copy deterrence and tamper evidence, but also important market developments anchored by important customer and partner wins across both the physical and digital domains. Of critical importance, these technological and market developments were all in the authentication area. This provided us the opportunity to continue focusing our business by prioritizing market opportunities in a single use case category as opposed to concurrently pursuing both categories.

While there are areas of overlap in the production [indiscernible] authentication use cases, there are also areas of fundamental divergence that require parallel or duplicative work. Thus, the opportunity to apply the greater level of focus was attractive not only because it would increase the trajectory of achieving meaningful revenue in the chosen area, but also because it would allow us to reorganize the company to act with agility and speed while dramatically reducing our cash burn. Important to stress that there is absolutely no confusion. We did not envision this second path as walking away from our identification use cases. Including this large deal Our identification use cases address problems that are worsening and that we are will continue to be uniquely positioned to best solve This second path reflected prioritization not elimination of opportunities by addressing them sequentially instead of in parallel. In assessing these two paths, analyze our various market opportunities using multiple lenses, including opportunity costs, which is the cost of missing upcoming important deadlines versus the risk, if any, of permanent opportunity loss from temporary deprioritization expected revenue across horizons quantifying time to significant revenue is a heavily weighted overlay to total addressable market and relative contribution margins.

Important in its own right, but also a metric that will impact ultimate value per share, as long as we continue to believe that the best use of free cash flow generation is share repurchases. Realizing the importance of getting this analysis right, we retained PWC to conduct an extended and detailed deep dive engagement with the dual mandate of challenging our every assumption and bringing us heavy voice of market input, spanning many participants, industries and ecosystems. This analysis allowed us to set a deadline to reach a decision on this large deal which we then partnered with our valued customer to determine the feasibility of meeting. As has been the case during this entire engagement, they were wonderful working with urgency and over holiday breaks in search of a way forward. They understood our position and offered to alter the scope of the engagement to provide more flexibility. They reaffirm the expected value they believe we bring to their operations. Ultimately, however, it became clear that meeting the deadline was just not feasible. Which allowed us to move forward on our second path I outlined a few minutes ago. Prioritizing market opportunities in the authentication area.

I will have more to say on exactly what this means in a minute, but before I do, support our valued customer achieve their bold vision is dead. All the details we laid out in the Q3 call about this customer's interest in our offering as does our understanding as for why they are not currently able to commit. While we were unable to reach agreement by the deadline we set, the process was wonderfully collaborative we remain in communication with them about potential next steps. While it is likely that any new agreement would require some descoping from what was originally imagined, this does not mean the dollar value of any new agreement would be less. In fact, there are reasons to believe the opposite could actually be true. I want to spend the rest of this call discussing what's ahead, but before I do, it is important to note five or beyond. It represents free and extremely significant upside to everything we will be discussing from here. Turning now to that path forward, for the time being, we will be focusing the majority of our go to market efforts on three areas under the broader authentication umbrella: Each of these three areas contain multiple individual use cases.

The first area involves assisting retailers fight shrink. Since the pandemic, retail shrink has exploded. As have the budgets assigned to combat this issue. We are advancing multiple individual use cases within the retail loss prevention area.

All of which leverage our detection software already installed on the vast majority of front of store scanners today. Within this suite of offerings, the two individual use cases we to annual recurring revenue in the near term work securing gift cards, and our work fighting price look up or PLU fraud. We spoke about our gift card opportunity a couple of calls ago and since then we have continued to make great progress. We are currently partnering with two largest industry players as well as multiple large retailers and large brands with a focus on catalyzing meaningful adoption this calendar year. As a reminder, we believe our immediate TAM is $900,000,000 to $1,500,000,000 per year with multiple drivers that will increase that range over time. There is a real urgency from all stakeholders to solve the exponential growth in fraud, as it is causing an existential risk to this $1,000,000,000,000 market and our solution not only significantly outperforms existing security measures, it allows for a reduction in total bill of material costs. Despite our work in this area beginning in earnest less than a year ago, this use case contributed initial ARR in Q3, more ARR in Q4 and we expect it to be a meaningful contributor to our 2025 results.

Retailers also lose billions of dollars per year to intentional misentry of PLU codes by their customers and in some cases their cashiers. Our solution to this problem delivers a deterministic override ensuring this avenue for theft is closed. We are focused on delighting our initial retail customer and are appreciative that they have recently begun introducing us to other retailers as an evangelist for the value we bring. We are also focused on being a wonderful partner to Picadelli as we have just scratched the surface of jointly delighting their large and global installed base. Starting just with salad bars and prepared food, we believe our immediate TAM ranges from $625,000,000 to $1,000,000,000 per year which provides our customers an extremely attractive ROI of two to three months. As with gift cards, there are drivers that should increase that TAM over time. Of course, as attractive as both opportunities are standalone, they are that much better together and each should act as lead generation for the other as they leverage the same technology stack and bring accretive value to an overlapping stakeholder group. While early days, this thesis is playing out, as our initial PLU fraud retail customer we'll also be an early distribution partner for our gift card solution.

Even with this synergy, we are being conservative and our assumption of the amount of ARR our PLU fraud offering will contribute in 2025 for no other reason than our standalone market development work is not as far along as our gift card efforts. The second broad area of focus is continuing to develop our growing suite of physical anti counterfeit solutions, including the incorporation of the technological These advancements open greenfield opportunities and provide a powerful and complement This broader offering spectrum will enable us to work with customers of all level of sophistication and provide as any single customer's needs evolve. Offering the full gamut of solutions differentiates us from competitors today and should allow us to seamlessly bring functionality down market to create even greater differentiation tomorrow. The opening of Greenfield opportunities in this space is not only tied to our recent advancements in copy deterrents, copy detection and tamper evident. But also to our progress in advancing additional methods of digital watermark application including our work with some of the world's leading laser companies. Meanwhile, other greenfield opportunities have nothing to do with digital watermark at all. Such as our work utilizing serialized QR codes in Digimarc Digimarc analytics to modernize and secure loyalty and reward programs.

These new greenfield opportunities represent a massive TAM and we are finishing up our work in conjunction with PwC to determine how best to capitalize on these new opportunities. In the meantime, we will continue to advance the work already in flight which has led to such wins as a customer with whom we signed a Digimarc Digimarc deal in Q3 five calendar days after we received their inbound, signing an additional deal in Q4 and February. Or a three year expansion deal we recently signed for first loyalty reward customer that now tops out at over $1,000,000 per year with additional upside possible from there. While we expect our physical anti counterfeit solutions to be a significant contributor to our 2025 ARR growth, true impact of this the Greenfield areas will likely only become obvious in 2026 and beyond. In fact, it was the combination of the materiality of these advancements and the massive market opportunity they unlock that began our internal conversation about prioritizing our authentication use cases.

We were, and our eager to begin harvesting the fruits of these advancements in a very meaningful way. The third area of focus involves applying our platform to combat various methods of digital fraud. Including the unauthorized leaks and or the improper usage sensitive and valuable digital assets.

To be clear, this is separate from our work identifying digital assets [indiscernible] Which I'll touch on a bit later when we discuss our ecosystem driven opportunities. Advancements in this third area of focus and span an exciting exciting array of end markets and individual use cases. For example, in Q4, we closed two deals in this area, one with a Fortune 100 company and the other in the crypto space. With individual use cases as different from one another as their businesses are. While we are finishing our work on how best to capitalize on these advancements, again in partnership with PwC, is already clear that working in the purely digital domain has multiple very attractive We have chosen to be very conservative about this to remove any risk of making penny wise pound foolish decisions. Thus, this entire area represents only potential upside to our expected 2025 results.

While the above three areas will consume the majority of our go to market they will not be our only source of 2025 revenue growth. For example, we expect to drive 2025 ARR from the consumer engagement use case we service via Digimarc Engage. We have recently signed what we believe to be two of the largest digital link deals [indiscernible] and expect our thought leadership and enterprise grade offering will allow us to capitalize on this early lead to capture a fair amount of this market. Both directly well as through our partners.

Our partners will also figure heavily in our other identification use cases such as the factory fulfillment or distribution center automation use cases we service via Digimarc Automate. We believe we have set up an influential ecosystem of both packaging and technology companies capable of fulfilling demand without our needing to be heavily evolved the sales process, Across the board, our current prioritization of authentication use cases does not mean that we are closing the door on other opportunities progressed by our valued and value add partners, both existing and new, In fact, this was exactly the operating leverage we set out to create with our Center of Expertise program. I also want to be very clear that our current prioritization of authentication use cases is a no way a signal that we have lost faith in opening the large and lucrative ecosystem driven opportunities of Digimarc Validate Media Digimarc Recycle Digimarc Retail Experience. Far from these identification opportunities going away, we believe the need to solve them will only increase our ability to solve them remain unmatched. This is not an either or, but a when. Moreover, focusing on becoming extremely profitable before actively reengage in these areas might very well allow us to open these markets with fewer shares outstanding than we have today.

Thereby increasing the impact these opportunities have on the most important metric by which we measure our delivery of shareholder value.

Value per share. Jensen Wang credits NVIDIA's success not to the fact they have ever been able to predict when the fruit will fall from the tree, nor do their ability to catalyze it to fall quicker, but instead to the fact that NVIDIA ensures it is positioned under the tree to catch the fruit when it eventually does fall. Looking at each of our ecosystem driven opportunities, we are comfortable in both the fact that the fruit will fall and that we are, will remain very well positioned to catch it when it does. Let me take each of these in turn. Starting with Digimarc Validate Media, while this was always viewed as the furthest away of our ecosystem driven opportunities, recent changes in the global political landscape will likely delay any meaningful action even further. In the meantime, the ascension of DeepSeq and outside the control of Western governments quite elegantly and powerfully proves what we have consistently said about the folly of a system built upon watermarking JEDAI output. This further increases the value of our solution not only as a standalone offering, but also and importantly to a strategic Not only was most of Bigstep Big Tech's work built on the premise, that their solutions would be applied to Gen AI Creative Content but there are also still many companies that haven't advanced a workable solution at all.

We believe this is a fruit that will eventually fall and beyond being ideally positioned when it does, our strategic value has increased in a dramatic way. Turning to Digimarc Recycle, earlier this week, in fact, just a few days ago, we signed a contract to provide a scope and SKU limited license to our central buyer in Belgium. This will allow them to run a market pilot that is shaping up to as the final showcase for the world. We share the frustration of some of the more enlightened industry participants who worry that the industry is playing a game of chicken with the upcoming implementation of [indiscernible] which if not soon corrected, will lead to a massive last minute dash to comply. Moreover, there is tremendous value in the novel consumption data our solution unlocks something made even more valuable in the era of AI driven analytics. We expect the Belgium pilot will convincingly show Our decision to offer this limited license ensures we keep our prime position under the tree, while we focus our efforts on use cases more likely to deliver significant revenue in the near term. We remain confident this fruit will fall and there is no one else positioned anywhere near as well as we are to catch it.

Moreover, as we prove the value of the data our solution unlocks, perhaps this will be the rare case where we can indeed catalyze the fruit to fall quicker around the globe. Interestingly, have a deposit return scheme opportunity in our pipeline in Digimarc that is larger than the Skop and SKU limited Digimarc recycle license we just signed in Belgium. Keep in mind that unlike Digimarc Recycle, which is an identification use case, our value add in DRS is providing item authentication. This DRS opportunity while also not a full country wide out, country wide rollout came together quickly our customer was motivated to progress and our shared success is dependent only on our customer being successful in their bill. Their bid It is wonderful being in sales cycles where the prospect has urgency to progress something we're seeing across the board in the areas in which we are now focused. I highlight this example as it is important to note that a focus on authentication does not mean we are out of all sustainability use cases. Instead, it just might end up meaning that we are prioritizing sustainability use cases that will provide an immediate benefit to our company as well as our planet.

As for Digimarc Retail Experience, as mentioned earlier, this might be the quickest of the fruits to fall and we are ideally positioned to catch it. Focus drives results and today's announcement today's announcement that we are prioritizing our authentication use cases another step in the journey we've been on these past few years. One of the first actions we took at the beginning of this journey was sunsetting Digimarc's Digimarc Code of Everything tagline because while it is true our technology can do almost everything, we know that if we didn't start with some things, would accomplish nothing. Unlike some of the areas we've exited these past few years as we've narrowed our focus such as our piracy intelligence business, which accounted for at the time we made that decision Today's announcement is simply a matter of sequencing. Not a permanent exit. This focus will not only increase the size and speed of our top line success, it has allowed us to reorganize our business to address the opportunities immediately ahead. Earlier today, we announced a corporate reorganization that will ensure we are optimally positioned to pursue our prioritized authentication use cases, will have the added benefit of reducing our cost base by approximately one quarter.

Our ability to make this meaningful a reduction in cost is predominantly driven by prior although it's augmented by our ever increasing operational efficiency we are driving, as we continue our own digital transformation journey. This includes smarter usage of outsourcing in addition to technology adoption. The majority of this cost reduction is the elimination of positions. And saying goodbye to teammates is never easy.

However, we fully understand our responsibility to all stakeholders including our remaining teammates, to continuously ensure we are operating in as healthy and sustainable a manner as possible. For the last twelve years, Digimarc has been operating at a loss, something that was simply not sustainable. And with our ability to apply an even tighter focus on some incredibly compelling opportunities, It was also no longer required. This reorganization will increase our ability to act with agility and speed, powering a virtuous cycle of success. Important to note, most of the position reductions were in the areas one would expect with a simplified use case focus. Namely R and D, product and engineering, as well as various back office support functions. Our quota carrying headcount has actually recently increased. Before I turn the call over to Charles, there is one last topic on which I believe it is important to provide transparency. Being on the cusp of turning free cash flow positive opens strategic alternatives heretofore unavailable to the company. To that end, we have decided to partner with Goldman Sachs to explore our full of potential options up to and including going private. No decisions have been made on which, if any, path or path we will ultimately pursue.

Nor have we set any deadlines for reaching any decisions. We are committed to maximizing shareholder value We do not plan to providing updates on this subject unless or until there is something relevant to share. I will now turn the call over to Charles to discuss our financial results. Thank you, Riley. Hello, everyone. Before I dive into our financial results, I want to highlight a couple of items that will impact future financial trends. First, as Riley already mentioned, we announced a corporate reorganization earlier today to better align our operations to the opportunities immediately ahead of us and to increase our ability to act with agility and speed.

We expect the annualized cash savings from the reorganization to be approximately $16,500,000 We have also identified approximately $5,500,000 in other annualized We will recognize one time reorganization costs of approximately $3,000,000 this [indiscernible] Second, Riley mentioned our increased go to market focus. With our Tiger focus, we have been conservative in our forecasting by not just budgeting for a potential increase in churn, but also to allow us the ability to be strategically price aggressive a handful of renewals outside of our current focus areas. Moreover and unrelated, due to a recent change in government requirements on the ease of program launch, we expect the $3,700,000 per year DRS contract [indiscernible] We share our partner's frustration with this development. To be clear, this has nothing to do with our technology, value add to this use case. Not only do we expect to win additional business from this partner in 2025, but we also have another DRS opportunity in our pipeline that Riley mentioned earlier. Now on to our Q4 and full year 2024 financial results. Ending ARR at the end of Q4 was $20,000,000 compared to $22,300,000 at the end of Q4 last year. Excluding the $5,800,000 commercial contract that lapsed, we grew ARR $3,500,000 during the year representing year on year growth of 21%.

As Riley mentioned earlier, we are still in discussions with the customer However, the rest of my prepared remarks assume that it does not. Leaving the impact of any future renewal as potentially significant upside to our expectations. The quarter, total revenue was 8,700,000.0 a decrease of $600,000 or 7% from $9,300,000 in Q4 last year. Subscription revenue, which accounted for 58% of total revenue for the quarter, decreased 10% from $5,600,000 to $5,000,000 The decrease reflects zero revenue recognized on the expired commercial contract just referenced Excluding the impact of the expired contracts, reflecting revenue recognized on new contracts and upsells on existing contracts. [indiscernible] service revenue was essentially flat at $3,600,000 reflecting higher commercial service revenue from Holy Grail recycling projects, partially offset by lower government service revenue. Subscription gross profit margin, excluding amortization expense, was 85% for the quarter down two percentage points from Q4 last year reflecting the impact of lower subscription revenue. Service gross profit margin was 59% for the quarter, up three percentage points from Q4 last year. We We continue to expect to generate mid-fifty percent service gross profit margins on a normalized basis with some fluctuation quarter to quarter. Operating expenses were $14,400,000 for the quarter, down 15% from $16,800,000 in Q4 last year.

The decrease in operating expenses primarily reflects lower cash compensation costs due to lower headcount and incentive compensation earned, and lower stock based compensation. Non GAAP operating expenses which excludes non cash and non recurring items, $11,900,000 for the quarter down 12% from $13,400,000 in Q4 last year. The decrease in non GAAP operating expenses primarily reflects lower cash compensation costs due to lower headcount and incentive compensation earned.

Net loss per share for the quarter was $0.4 versus $0.52 in Q4 last year, while non GAAP net loss per share for the quarter was $0.22 versus $0.28 in Q4 last year.

Now turning to the full year. Total revenue was $38,400,000 in fiscal twenty twenty four, an increase of $3,600,000 or 10% from $34,900,000 in fiscal twenty three.

Subscription revenue, which accounted for 58% of total revenue for the year, increased 18% from $19,000,000 to $22,400,000 The increase reflects revenue recognized on new contracts and upsells on existing contracts, partially offset by $2,100,000 of less revenue recognized on the expired commercial contract I referenced earlier. Excluding the revenue from the expired contract in both 2023 and 2024, subscription revenue would have increased $5,600,000 or 38%. Service revenue was essentially flat at 16,000,000 reflecting higher commercial service revenue from wholly grown recycling projects, partially offset by lower other commercial service revenue and slightly lower government service revenue.

While we generally don't provide forward looking guidance, it's important to point out that we expect government service revenue to be 1214% lower in 2025 than 2024 due to a smaller approved budget for program work in 2025 driven in part by budget tightening across global central banks. This smaller 2025 budget is not a reflection of either our the Central Bank's commitment to the CDS program. The floor for the 2026 budget has already been set at flat from 2025 and any additional work added to the program would lead to year over year growth. We also expect government service revenue to be spread out a four. Subscription gross profit margin in excluding amortization expense was 87% for the year, up three percentage points from last year reflecting the impact of higher subscription revenue combined with a favorable mix of revenue. Service gross profit was 59% for the year up five percentage points from last year. Reflecting a favorable change in service labor mix. Operating expenses decreased $2,800,000 or 4% fiscal twenty twenty three to fiscal twenty twenty four. The decrease in operating expense primarily reflects lower cash compensation costs due to lower headcount lower stock based compensation, lower depreciation and amortization partially offset by higher professional services and consulting costs.

Non GAAP operating expenses decreased $1,200,000 or 2% from fiscal twenty twenty three to fiscal twenty twenty four. The decrease in non GAAP operating expenses primarily reflects lower cash compensation costs due to lower headcount, partially offset by higher professional services and consulting costs. Net loss per share for the fiscal year was $1.83 versus $2.26 last fiscal year. Non GAAP net loss per share for the fiscal year was $1.01 versus $1.3 last fiscal year.

Now turning to cash flow. We ended the year with $28,700,000 in cash and short term investments. Free cash flow usage was $4,400,000 for the quarter, compared to $5,600,000 in Q4 last year. The improvement in free cash flow largely reflects a smaller net loss although timing of customer receipts and payments also factor in. Looking ahead to Q1, we expect free cash flow usage to be between $5,700,000 and $6,200,000 which includes approximately $3,000,000 in reorganization related costs. Most of which we expect to be paid in Q1. Excluding these one time reorganization costs, our normalized free cash flow usage for Q1 twenty twenty five of $2,700,000 to $3,200,000 would be down nearly two thirds Q1, Looking beyond Q1, we expect to deliver material reduction and to achieve positive non GAAP net income by no later than Q4 twenty twenty five with final timing dependent on the trajectory of our ARR growth during the year. As a reminder, we use non GAAP net income as a proxy for normalized free cash flow generation. Looking ahead to 2026, while it is still early, we currently expect to deliver significant top line growth the magnitude of which will ultimately be dictated by the true Riley previously discussed.

The combination of expecting to enter the year non GAAP profitable and our best in class operating margin leverage should provide significant positive free cash flow per share as a very high percentage of top line growth would drop straight to the bottom line. For further discussion of our financial results and risks and prospects for our business, please see our Form 10 ks that will be filed with the SEC. I'll now turn the call back over to Riley for final remarks.

Thank you, Charles. Focus drives results and today we took another yet another step forward in the application of that powerful tool to our business. Recent breakthroughs in both invention and market development have allowed us to reorganize the company to focus on the exciting opportunities immediately in front of us. Something we've been reluctant to do ahead of these breakthroughs despite our always having a deep appreciation of the value in so doing. To avoid any possible confusion, I want to be clear, We are not permanently walking away from any opportunities. Instead, we are simply addressing our TAMs sequentially. In addition to accelerating growth in the short term, this sequencing should allow us to maximize the shareholder metric upon which we apply our greatest focus. Value per share. Six quarters ago, we transitioned from talking about optimizing our subscription gross margin to optimizing our overall contribution margin. Not because we were or are any less focused on our product costs, Instead, it was because we were advancing our strategic focus from just our offerings to our overall business and taking the initial steps of building the incredible operating leverage into the business we know it is uniquely capable of delivering.

While that work has been evident these past few quarters, we expect the next few quarters will highlight it even more. By both growing ARR and reducing costs, we expect to achieve non GAAP profitability by no later than Q4 of this year a milestone this company has not achieved in twelve years. Looking ahead to 2026, we expect to deliver significant top line growth the absolute level of which will be dictated by the trajectory of our penetration of our focused markets. Given the size of our markets, the operating leverage we've been hard at work building into the business, and our relatively low share count It will not require much penetration of these markets to deliver dollars of free cash flow per share.

Being on the cusp of turning free cash flow positive provides us options heretofore unavailable and we've decided to partner with Goldman Sachs to explore that full range of options. We have set no deadlines nor do we plan on providing any updates unless or until there is something relevant to share. We are committed to maximizing shareholder value and opt Ryan will now open the call up for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. While we poll for questions. The first question comes from the line of Joshua Riley from Needham and Company. Hey, Josh. All right. We'll fit.

Well, thanks for taking my questions here.

So maybe just starting off, if we look at the the large commercial customer opportunity, In the prepared remarks, it appears the opportunity is still there. The timeline is a bit undefined, I would say, at this point. How are you thinking about allocating resources following the reorg to this opportunity? And can you still pursue this opportunity while pivoting the go to market as well?

Yes. Thanks, Josh, for the question. Absolutely accurate. That the opportunity is still very much there. As I mentioned, we are still in conversations about potential next steps. But as to, how we will resource it, this is where I was saying it could be descoped. Obviously, our focuses on other areas for the time being. But it was that's why I called out in my prepared remarks that there's it will likely be be scoped Do not take that to me, it will be less money. And without getting into exactly what we're doing with them and why could have taken longer than both sides have thought to close It's hard to really explain that. But we are absolutely able to support this opportunity when the customer is ready. We are still having conversations about this opportunity We're not building our business around it. We didn't do any 2025 planning. If this comes in, this year, it is going to be significant upside. And we'll see what happens. Got it. Understood. Maybe you can just help us level set here a bit. There's a lot of information in the prepared remarks If we think about the opportunity for sequential ARR growth throughout 2025, what products and opportunities would you highlight as having the best chance to drive kind of this near term sequential growth in ARR off the current base?

Yes. So gift cards, the one we talked about, right, that's going to be a significant contributor. And then the physical anti counterfeit, is another very large contributor. On that second, portion, a lot of the truly exciting greenfield things we talked about. So types of watermark, New application, watermarks, Other things in the authentication space besides watermarks, we expect the real pig in the python in 2026. So we expect significant growth in 2025 just on what we're currently going after. But what's really exciting is what prioritizing this and looking at this this year, what it can mean for 2026 and beyond.

So those are the two biggest areas, but we talked about we expect revenue from Engage digital link and DPP in The U. S. Sorry, in Europe, these are two macro drivers. We believe we've signed two of the largest digital link deals It's going to help us take our fair share of this market, we believe. I mentioned our digital work, we don't have anything in our projections for 2025, and that we have a growing pipeline. Trying to be conservative there. So and then our partners, I mean, we still have wonderful partners. We've been very intentional about building out this center of expertise It's not just a force multiplier, It's also we've been talking about the operating leverage we know this business can manage. And they're a big part of that So those are the areas again, it's nothing I didn't mention in my prepared Digimarc, but if you're looking for the top two, it would be gift cards, and the physical and the counterfeit Got it. That's super helpful. And then Charles, as we think about the new run rate of operating expenses, maybe you can just help us think about the sequential step over the next several quarters to getting to that free cash flow breakeven or potentially even positive figure?

And how much of that are you thinking is dependent on revenue growth versus cost cuts that are going to be coming into the model here?

Yes, it's clearly both and we don't give revenue guidance itself. So I'm not going to give a specific number, but me talk about some of the components here because people can kind of model it themselves. So you use Q3, Q4 as kind of a normalized level of operating expenses, start to think about Q1. Q1 is always a little bit higher in the fact that there's a bunch of year end costs and then we're also going to have about $3,000,000 of reorder costs. So Q1 is not going to be reflective of a go forward rate. But if you use kind of Q3, Q4 as a baseline, and then what I said was, we expect to take out about $22,000,000 of annualized cash cost savings not all of those are going to kick in, in Q1, but a significant portion of those will kick in, starting in March. You can start to see that we're going to take out over $5,000,000 a quarter in cash costs. So that obviously is a massive driver in it. But we also expect to see significant revenue growth as Riley said. So the trajectory of that is to be determined how quickly we get to non GAAP positive during [indiscernible] But you can see just with the cost reduction that that gets us pretty close based off of kind of what the normalized run rate's been.

Does that answer your question, Hudson?

There's a lot of pieces there. I tried to leave a lot of little bread crumbs throughout as far as some of the numbers and stuff so that people could kind of model that stuff out themselves. [indiscernible] Understood. And then last one from me is, as we think about the Belgium license that you just signed, what is the timeline of this pilot project being implemented and evaluated? And maybe what are some of the proof points you would hope to show during the pilot to get really Europe to move towards a broader commercial use of the recycling product?

Yes. So we believe our technology is proven to work. Holy Grail has proven that. There's some results that will be coming out that I think independently validate that. The Belgium pilot is our central buyer. There's a central buyer in Belgium who wants to [indiscernible] We talked about our new go to market where we provided for less than $1 per capita unlimited access to Digimarc Recycle, What we have done here in Belgium They weren't ready to take All of that right now. So we're doing a limited license. We think there is two massive pieces of value that our technology brings The first is higher quality and quantity of recyclate. That's a lot of the focus in Europe at least [indiscernible] they need that to comply with this upcoming regulation. That's coming in the next couple of years. So there's that. We also believe it's lucky happenstance because of our technology sits at the end of a product's life. Right? Just because that's what it's helping to do is sortation there is novel data data that has never been captured That end of life, once a product leaves the front of a store, it is a data desert and while there's always been value in novel data in the era of Gen AI, or NAI, but especially a lot of these LLMs, the ability to get the company that wins is the company who has the least amount of data the company who's got the biggest part of their end to end value prop with clean, novel data that just so happens to be what Digimarc Recycle also is a byproduct of higher quality and quantity of recycle it.

So without getting into what our buyers trying to do with our technology, what they're trying to prove, you could assume It is Europe. Trying to provide the higher quality and quantity of recycled to be compliant with PVWR. Ahead of a broader adoption content wise We think a byproduct of this test is going to be brands seeing the brands and retailers seeing the value of the data. And that's where I was saying that could actually catalyze further adoption is you know, We would hope to see widespread adoption Digimarc Recycle because it's [indiscernible] to the planet. We have a single planet and we don't do something about plastic waste. [indiscernible] If it ends up getting adopted, because along the way people realize wow, there really is a ton of value in this data. Data we've never had access to before.

Okay.

We'll take it. [indiscernible] you could assume that they're testing for the impact we make on the higher quality and quality recycle we believe that during this trial, the value of the data. We can get both. We can get it. We'll prove that out, no problem. But the data is going to be shining star and perhaps a little bit undepreciated by the industry. I think the industry hears us say value of the data. I think once they actually get their hands on it, it's going to be a little more obvious for them.

Understood. Thank you, guys. Thanks, Josh.

Thank you. Ladies and gentlemen, The next question comes from the line of Jeff Van Rhee from Craig Hallum Capital Group. Please go ahead.

Hey guys, thanks for taking the questions. Just a few for me.

On the Walmart contract, the 5,800,000.0 ARR that lapsed in anticipation of signing of this transformational contract, Just want to be clear, your expectations on that $5,800,000 does that come back into play now or is that indefinitely shelved?

Yes. So Jeff, we don't we haven't talked to any of these contracts with [indiscernible] $5,800,000 contract that lapsed in Q3 of last year. We were in conversations with this customer to expand that contract. And that is what we're saying on this call that We're still in conversations with them. Them.

Okay.

Does I mean, I'm trying to understand the comments in the script about churn So there's also another $3,700,000 with that same customer that is referenced in the Q and K. So Yes, it's a different customer that we signed a $32,000,000 deal, I don't know, two years ago about, there were multiple, there were three products that that customer signed up for. One of them was DRS.

As Charles mentioned. For that rolling out. Something has changed not a result of our technology relation with a partner, So that contract [indiscernible] But different customers No, no, no, no, no, no. There was an original Walmart contract was a $3,200,000 ARR. And so my question was, So again, we don't talk about customers. We have talked about the $3,000,000 Walmart deal that is still in play. That's a We still have revenue. We That contract that we signed for Walmart to watermark their private label products it's still in force. So watermark their private label contract. They It's really been a difficult conversation here, Jeff. I mean, I think you the $5,800,000 one, [indiscernible] [indiscernible] We have customers that have multiple contracts with us.

Yes. I mean, I get it, Rob. Look, I'm not trying to be difficult, but these are big contract that you do break out in the queue with this customer and everybody knows that. I'm just trying to get a sense of whether or not we should assume or believe that the five point eight and three point two are at risk. I'll leave that alone. You obviously don't want to go there. On the DRS contract, which is the one you just started to answer a second ago, the $3,700,000 of DRS contract, Can you just expand a little bit more? They're obviously pretty frustrated you're into that contract and somehow they pulled the plug mid contract. Can you just talk about that a little bit?

Yes. So Charles talked about another script. The eve of rollout, the government changed the program. We talked about when we signed that deal, that we were providing our technology to a company that was launching three of their own products. You can think of it we were a sub basically on that deal. And the government changed the program.

What I mean, does that mean the entire program is is I mean, are they going to be able to function without you? Or is this just a complete redirect on their part?

I'm not going to get into somebody else's business, but it impacts our relationship with that It impacts our contract Our contract with that customer had three products [indiscernible] This was one of them. They're no longer taking our technology and all have access to our platform for that product because they no longer need it. We did say a couple of quarters ago and I reiterated in this call that we expect to launch another product with this customer. So this isn't a relationship issue with our customer. It is Their business changed. With their customer, this government, Did I lose there Riley? Yes.

I'm So I don't know what else you want me to say, Jeff, but Okay. Let's try a third here. In the script, you said we're not just budgeting for potential increase in churn, but also to allow us to the billing strategically price aggressively on a handful of renewals outside our current focus areas. Can you expand on that? I don't understand what that is pointing to?

Yes. All we're saying, Jeff, on that specifically, we are focusing a portion of our we are focusing on the authentication use cases. We are being conservative when we're budgeting that we're going to reach breakeven at no later than Q4 for a whole lot of things [indiscernible] So we're trying to be conservative in our budget. There are the that's the churn part. Ability to be price aggressive There are a couple of areas that we are not focused on right now that we like to keep our footprint. If it's not an area of focus, we might be a little more price aggressive than we would historically. That's all we're saying. The overall point Charles was calling that out to give everybody but also to everything that we've said, everything that Charles said in his prepared Digimarc, is obviously incorporated in our punchline which is we expect breakeven no later than Q4 of twenty twenty five.

Okay. And so I guess just last for me then on that topic. You obviously had pretty substantial sequential non GAAP OpEx drop of roughly $2,000,000 Charles, you're talking $22,000,000 in annual costs to come out. Just to be clear, it looks like you're down $2,000,000 and that probably took place mid quarter in Q4. So I'm not sure how to read your comment. You've already got $2,000,000 out You had your qual mid quarter Q4. So if you got $2,000,000 out and you only had half quarter, it seems like you might have taken out already $4,000,000 Just trying to understand what the baseline is, if you can just revisit your explanation there?

Yes. I think the way I would look at it, there were some unusual kind of fluctuations Q3, Q4. I would look at Q3, Q4 in kind of average as a more of a normalized base Okay. Average those two and then use that as a base to which you'll take the cost out?

Yes.

I mean there were some in Q4, there was some lower headcount cost, but the reorganization itself happened today. And so none of those costs are reflected yet in the Q4 number.

Got it. Okay, great. That's helpful. Thanks so much.

The next question comes from the line of Jeff Bernstein from Silverberg Bernstein Capital. Please go ahead.

Yes. I was just curious on the contract that has not renewed yet that still might be out there. Was there any complication [indiscernible] a big player in supply chain technology.

Yes. I really don't want to get into what's going on with any [indiscernible] customers, Jeff, This as we described on the Q3 call, What this customer and they're still a very happy customer of Two other contracts, two other live contracts with them. Three other sorry, three other live contracts with them, I was just reminded. Very happy customer, There was something they wanted to do that would transform an industry We've been partnering with them to do it. They've been wonderfully transparent They've been wonderfully collaborative. [indiscernible] mentioned on the Q3 call that the biggest risk of this happening was we have a lot of other things we really wanted to focus on and how long the conversation. It is still live. I don't want to get into what's taking them longer. And I really don't want to say anything more than what I've said, but But we're still in conversations about potential next steps. If we were to sign this, it would probably be the scoped versus what it originally was. But don't take d scoped to mean lower dollar amount. There's actually a reason to believe could be a higher dollar amount. And it's upside. We're not building our Okay.

No, that's great. Understand. Yes. Just one thing, this is back to what Jeff, Benry was asking, everything that we've said here all comes down to the punchline as we expect to be profitable no later than Q4 of twenty twenty five even with all of this stuff. So not getting discussed this deal is fine. If this deal is signed, this is a significant, significant deal. Got you.

Understand.

And then just wanted to clarify a couple of other things.

On the price lookup fraud application, I think you talked about a retailer and then you talked about Picadilly. And I'm not sure if you were if that's who you're talking about or etcetera. Could you just go back through the comments you made about price lookup fraud and just clarify going on there? 100%. So Picadelli is a partner of ours. Picadelli is a salad bar provider. I think they're in North of 2,000 stores are available. That's a partnership we've announced publicly We also have a right? One, we have all of the untapped wonderful Picaudelly customers that we could jointly delight together. And then we also have our first customer who's now live [indiscernible] to the point of making introductions to other retailers for us. Because it was wonderful. Nothing is more [indiscernible] when a customer becomes an evangelist, for no benefit to them except for the fact they just really love this technology and it's adding value to their business and they want to share with other retailers. So but those are two. The live Piccadilly is not a customer of ours, there's a partner of ours. We do have a live retailer U. S.-based is a customer.

Got you. Okay. And then just to clarify, this application, I think I hate to mention the name of your large partner again, but there was recently an article going around about how Walmart had barred a customer from every Walmart in The United States because of a fraud practice, which I think was price lookup fraud, but just want to clarify if that's your understanding.

I don't know the deal know what you're talking about. I would say that one area when you talk about retail loss prevention, there are multiple use cases under retail loss prevention. Right? So we have the gift card, we have the PLU fraud, There's other use cases right? We call out those two because we think those will be the two biggest drivers of 2025 ARR.

But to your point, and to Jeff's question, for example, there's been press from Walmart or out of Walmart and the use of our technology and their private label to help us shrink. That absolutely happens. In terms of we add that value there as well. So there's other use cases that retailer can benefit from our technology that shared stack sitting at the front of the store, The two that we called out on this call is PLU fraud and for the gift cards. But that doesn't mean that there aren't others And then over time, that's what we want to do. We want to grow that suite. Of offerings because you have the same tech stack, right front of store, scanner, Our technologies are ubiquitous there. Selling into the same stakeholders at these retailers and the ability to add accretive value [indiscernible] The more solutions they take, the more value they each get. Is pretty powerful.

Okay. And then a couple of times you guys were referred to technology advancements unlocking applications etcetera. And you also mentioned something about working with some of the major laser companies. Can you just flesh out the particulars of all that?

Yes, sure. So there's a couple of things that have happened in their physical anti counterfeits space in the last couple of quarters. We talked about it I was talking about in the Q3 call and again [indiscernible] [indiscernible] incredible invention in market development and the invention was in the area of [indiscernible] So there's been three areas I guess growth or new greenfield opportunities The first is technological breakthroughs, so copy deterrents. Making it harder to copy something Copy detection which gives a deterministic outcome on whether this is a copy or not, or tamper evident, So those are three new ways of new technologies were excited, new use cases, new benefits.

That we currently we don't have to the level we have now. We put out a press release on the copy detection a couple of months ago. It is really, really impressive stuff and really, really meaningful and Tim expanding stuff. So that's one. Two is the new application The other greenfield areas from new ways of applying watermarks. And I know Jeff is something you've been focused on for a while, but working with some of the world's leading laser companies, to apply our watermark, that's a whole brand new area.

And then the third greenfield area for us in product authentication, physical product authentication is even related to the watermarks. We have a loyalty and reward program using serialized QR and some analytics we built in Illuminate for to modernize loyalty and reward programs.

A whole bunch of areas where Digimarc Digimarc historically I think was what most people knew what we had. There's been progress, new areas we can get into because of invention, because of new ways of applying watermark. New solutions we have have nothing to do with watermarks.

Got you. Okay. And then finally, you had some activities going on in factory automation.

It sounds like that's another one of these categories that's going to kind of move to the side until there's customer pull that's greater and it doesn't take up the resources that you're now focusing on the areas you talked about on the call.

Yes. So we call that out specifically. This is a specific product where we have a really robust ecosystem. Of both packaging companies and technology providers that are more than capable of advancing these deals without us. This was the whole idea of building the CLE program out. Is to make our partners [indiscernible] and on [indiscernible] That's a very robust and influential ecosystem.

Got you. Okay, that's great. Thank you.

And again, Jim, I would say beyond just that, right, tried to make clear and I realize the prepared remarks was there was a lot there. I was were trying to give as much information as we possibly could. Even beyond that, just in general, We're always open for business with our partners. You have value add and valuable partners. Existing and new. [indiscernible] where we're focused is in the three areas of I'm sorry, of Authenticate. That's where we're focused. With our go to market efforts.

We still have areas outside of that you mentioned Digimarc Digimarc and then we have our partners. Right? And our partners are powerful and whether it's existing partners, whether it's new partners who say, hey, listen, I Can I get trained up as a COE? For specific use case? Absolutely.

Got it. Thank you.

Thank you. As there are no further questions, I would now hand the conference over to Riley McCormack for his closing comments.

Thanks, Ryan, and thank you everybody for dialing in today. I appreciate your your on the call. Have a good rest of your day.

Thank you. Ladies and gentlemen, the conference of Digimarc Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.