DMRC - Digimarc Shows Promise But Details Are Scant

2023-10-06 15:12:11 ET

Summary

• Digimarc Corporation enables product digitization and identity verification worldwide.
• The company recently launched its Validate product, but there is no guidance on its go-to-market plans or rollout.
• The stock's recent runup and lack of management detail leaves me in the Neutral [Hold] camp until we have greater visibility into its near-term outlook.

A Quick Take On Digimarc

Digimarc Corporation ( DMRC ) enables product digitization and identity verification worldwide.

I previously wrote about DMRC with a Hold outlook.

The firm has recently enjoyed a large contract win, but management hasn’t provided details on revenue recognition or cash flow.

Also, DMRC recently launched its Validate product, but it’s early days, and we don’t have any guidance from management on its go-to-market plans or rollout.

Given the stock’s recent runup and lack of management detail, I’m Neutral [Hold] on DMRC until we gain greater visibility into its near-term outlook.

Digimarc Overview And Market

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

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

The firm’s main offerings include the following:

• Validate - proactive brand protection

• Recycle - sorting for plastic recycling

• Engage - DTC digital communications

• Retail Experience - retail product watermarks.

Digimarc focuses on the industries of consumer packaged goods, apparel, tobacco and fresh foods and seeks new customers via in-house sales and marketing efforts and through partner referrals.

According to 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 primary reasons for this expected growth are a growth in ID wallet solutions and a rise in online service 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 to customers.

Digimarc’s Recent Financial Trends

Total revenue by quarter has continued to grow, but operating losses have remained substantial:

Gross profit margin by quarter has been steadily improving; Selling and G&A expenses as a percentage of total revenue by quarter have been dropping but remain extremely high relative to revenue.

Earnings per share (Diluted) have remained heavily negative, but have made some progress toward breakeven.

(All data in the above charts is GAAP.)

In the past 12 months, DMRC’s stock price has risen 142.71%, as the chart shows below:

For balance sheet results, the firm ended the quarter with $34.5 million in cash, equivalents and short-term investments and no debt.

Over the trailing twelve months, free cash used was a hefty ($35.5 million), during which capital expenditures were only $0.3 million. The company paid $11.0 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 last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management’s prepared remarks highlighted closing two deals with divisions of top 25 CPG firms for "sandbox" versions of its factory automation platform.

The company added two new value added resellers (VARs).

Digimarc also showed resilience in inking "multiyear extensions with six important customers in Q2, five of which resulted in a meaningful increase in annual recurring revenue."

Total revenue for Q2 2023 rose by 13.0% year-over-year, while gross profit margin increased by 2.7%.

Selling and G&A expenses as a percentage of revenue fell by 54.4% YoY, but remained extremely high at 109% of total revenue.

Operating losses were reduced by 26.2% year-over-year, to $11 million for the quarter.

The company's financial position is uncertain, with some liquidity, no debt but significant cash burn in its recent history due almost entirely from high operating losses.

Looking ahead, consensus 2023 full-year revenue is expected to grow at 13.5% over 2022.

If achieved, this would represent flat 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 risen sharply as investors believe the stock will benefit from the need for AI watermarking solutions, among other aspects, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include positive revenue growth from its recently launched Digimarc Validate product, enhancing copyright protection.

However, management provided no details about how it was going to monetize Validate, and on what timeline.

Also, while the firm expects to start seeing some incoming cash flow in the back half of 2023 from its recent large contract win, no details were provided there, either.

Given the recent runup in the stock and lack of visibility into near-term cash and revenue generation, my outlook on Digimarc Corporation is Neutral [Hold].

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