DMRC - Digimarc Continues Growth While Reducing Operating Losses

2023-12-21 17:45:29 ET

Summary

• Digimarc Corporation sells technologies for product digitization, validation, and identity verification worldwide.
• The company focuses on industries such as consumer packaged goods, apparel, tobacco, and fresh foods.
• Digimarc's recent financial trends show growth in total revenue and progress towards breakeven operating income.
• I reiterate my Hold outlook for Digimarc Corporation shares.

A Quick Take On Digimarc

Digimarc Corporation ( DMRC ) sells technologies that enable product digitization, validation and identity verification worldwide.

I previously wrote about DMRC in October 2023 with a Hold outlook on an uncertain trajectory for its Validate system.

While I’m not ready to change my outlook from Hold just yet, Digimarc Corporation stock is worth putting on a watch list for further improvements in fundamental financial results and initial marquee customer wins for its Recycle system.

Digimarc Overview And Market

Oregon-based Digimarc provides a range of product digitization technologies that use QR codes and digital watermarks to confirm product authenticity, reduce counterfeiting, improve supply chain traceability and increase the accuracy of recycling efforts.

DMRC is led by president and CEO Riley McCormack, who was founder and PM of Tracer Capital Management and a partner at Coatue Capital.

The company’s primary offerings include the following:

• Validate - proactive brand protection

• Engage - DTC digital communications

• Retail Experience - retail product watermarks

• Recycle - sorting for plastic recycling.

The firm focuses on the industries of consumer packaged goods, apparel, tobacco and fresh foods and targets new clients through its direct sales and marketing efforts and via partner referrals.

Per a 2023 market research report by MarketsAndMarkets, the worldwide market for digital identification products and services was estimated at $27.9 billion in 2022 and is forecast to reach $70.7 billion by 2027.

This represents a forecast CAGR (Compound Annual Growth Rate) of 20.4% from 2022 to 2027.

The main elements producing this expected growth are an increase in ID wallet solutions and a rise in online services across a range of industry verticals.

The integration of machine learning, AI and blockchain-based technologies will provide vendors with opportunities to differentiate their offerings with customers.

Digimarc’s Recent Financial Trends

Total revenue by quarter (blue columns) has continued to grow due to increasing annual recurring revenue growth; Operating income by quarter (red line) has made progress toward breakeven because of reduced SG&A costs and improving gross profit margin:

Gross profit margin by quarter (green line) has trended higher as a result of higher subscription profit margin; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have continued to drop due to a lower headcount and reduced contractor and consulting expenses:

Earnings per share (Diluted) have stabilized in the past two quarters, although they remain heavily negative due to high SG&A costs:

(All data in the above charts is GAAP.)

In the past 12 months, DMRC’s stock price has risen by 96.06%:

For balance shee t results, the firm ended the quarter with $33.3 million in cash, equivalents and short-term investments and no debt.

Over the trailing twelve months, free cash used was $0.3 million, during which capital expenditures were $0.1 million. The company paid $2.7 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Digimarc

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Commentary On Digimarc

In its most recent earnings call (Source - Seeking Alpha ), management’s prepared remarks highlighted growth in its annual recurring revenue [ARR] of 54% year-over-year, with a higher rate expected in Q4 2023’s results.

Also, its subscription gross profit margin rose to 85.5% and management believes it can generate still higher gross profit margin in the periods ahead.

Leadership noted the recent announcement of its Recycle system being adopted throughout the country of France, an important milestone for the firm as it continues to pursue other go-to-market approaches such as partnering directly with brands and retailers.

Analysts questioned the leadership about new customer acquisition in France, its Validate product traction and overall pipeline growth.

Management said that its new potential deal in France was with a large "logo," which it believes is necessary for future selling opportunities.

On its Validate product, leadership indicated it was too early to quantify expected traction but said the company is having conversations with large potential customers on the content creation and detection sides.

Leadership said that overall pipeline growth was aligned with its ARR growth trajectory.

For the quarter’s results, total revenue rose by 15.4% year-over-year and gross profit margin increased by 4.4%, buoyed by its subscription revenue increase.

Selling and G&A expenses as a percentage of revenue dropped by 54.6% YoY on lower headcount and reduced contractor and consulting expenses, while operating losses were lowered by 36.1% to ($9.9 million).

The company's financial position is solid, with ample liquidity, no debt and menial free cash used in the trailing four quarters.

Looking ahead, 2023 full-year revenue is expected to finish at a growth rate of 21.8% over 2022.

If achieved, this would represent a higher revenue growth rate versus 2022’s growth rate of 13.6% over 2021.

In the past twelve months, the firm's EV/Sales valuation multiple has almost doubled to 20.4x, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include signing a new logo customer for its Recycle system in France or announcements regarding generative AI-related technologies that may propel the stock upward.

Digimarc has improved its results, but the firm is still generating significant operating losses, and the stock has had a material runup in the past year.

While I’m not ready to change my outlook from Hold just yet, the stock is worth putting on a watch list for further improvements in fundamental financial results.

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