On Tuesday, Digimarc (NASDAQ:DMRC) discussed first-quarter financial results during its earnings call. The full transcript is provided below.

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Summary

Digimarc reported a 9% sequential growth in ARR for Q1 2026, with an expansion of subscription gross margin by 400 basis points year over year.

The company made significant strategic progress, including signing its first commercial order for a secure gift card solution and advancing rollout plans with 15 North American retailers.

Operating expenses were reduced by 36% to $11.7 million, leading to an improvement in non-GAAP net loss per share from $0.40 to $0.07 year over year.

Despite a decrease in total revenue to $7.6 million, Digimarc secured upsell deals for its anti-counterfeiting solution and continued to see market pull for its digital trust and integrity solutions.

Future outlook remains positive with expectations for significant ARR growth in 2026, driven by increased engagement in strategic areas like digital trust and AI security solutions.

Full Transcript

OPERATOR

Greetings and welcome to the Digimar Corporation First Quarter 2026 Financial Results Conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press Star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Charles Beck. Thank you. You may begin.

Charles Beck (Chief Financial Officer)

Welcome everyone to our first quarter earnings call. I'm Charles Beck, Digimarc CFO and I'm joined today by Riley McCormick, Digimarc CEO. On the call today, Riley will provide a business update and I will discuss first quarter 2026 financial results. This will be followed by a question and answer forum. We have posted our prepared remarks in the Investor Relations section of our website and we'll archive this webcast there. For those of you dialing in, this is a reminder that we are simulcasting the presentation we will walk through today. If you would like to follow along with the slides, I would encourage you to join our webcast as referenced in our earnings press release shared earlier today. Before we begin, let me remind everyone that today's discussion contains forward looking statements that have risks and uncertainties. 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 a business update.

Riley McCormick (Chief Executive Officer)

Thank you Charles and hello everyone. On this call we will walk through Digimarc's Q1 performance, highlight our strategic progress across product innovation and commercial execution, share updates on financial metrics such as Annual Recurring Revenue and free cash flow and provide clarity on where we are focused in 2026. In Q1 we made significant progress in advancing adoption of our secure Gift card solution. As we shared on our Last call during Q1 we achieved a critical milestone by signing our first commercial order covering six closed loop and open loop brands. We also made headway in laying the rails for additional orders and are currently advancing initial rollout plans with 15 North American retailers including eight of the 20 largest as measured by sales, an increase from eight and four respectively since our call only two months ago. We secured upsells with three existing customers of our anti counterfeiting solution. We continue to execute against a large opportunity in digital trust and integrity, securing a six figure upsell with an existing customer while progressing a natural and exciting extension of our trust layer strategy that provides a critical unmet need for scalable autonomous AI. And we continue to add key talent across our company, especially in our go to market functions including the recent addition of two accomplished sales leaders who have hit the ground running. Touching on our financial highlights. In Q1 we grew ending AR 9% sequentially while also expanding our subscription gross margin 400 basis points year over year. We ended the quarter with $10 million of cash and investments and no debt and we expect to implement our new corporate structure shortly, allowing us to realize the benefits discussed on our last call. As a reminder, our three focus areas are retail loss prevention, product authentication and digital trust and integrity and we serve these markets with the seven solutions you see listed on this slide. In addition, we continue to selectively engage outside our three focus areas when the opportunities represent low distraction revenue and or advance our positioning in longer term strategic areas. Starting with an update on retail loss prevention, we continue to make progress towards gaining widespread adoption of our secure gift card solution aided by the industry's hyper focus on finding an answer to the fraud that is creating an existential threat to their business. Results to date demonstrate the power of our solution significant fraud reduction, improved checkout experience and high scalability across printers, brands and retailers, all without any adverse impact on sales. As a reminder, we have posted a Gift Card Investor supplemental on the Investor Relations section of our website, a hyperlink to which can be found on this slide. We appreciate the feedback we have received regarding the benefit the supplemental has provided in helping investors better understand the opportunity ahead. We are experiencing a noticeable uptick in market pull for our solution as the level of retailer, brand and gift card network engagement has increased meaningfully. Meaningfully even from our last earnings call just two months ago. Before I provide more details on that increased engagement, I want to provide an update on the two rollouts we shared on our last call. First, the rollout to all Chinooks locations is underway. Next, the summer rollout with the other retailer mentioned will be more limited than originally planned with the full almost 600 location rollout now targeted for January 2020. As discussed in our March call, the greatest source of timing risk has been the scanner vendors shipping generally available versions of their firmware running our latest software. While eight scanner models were general availability in the requisite time frame we highlighted on that call, two were not, including one model critical to this retailer's front end. This delay had nothing to do with our software. Instead it was related to base functionality, key to enabling the retailer to push any firmware update in a scalable fashion leading to the smaller summer launch. The scanner vendor has subsequently shipped the updated firmware which is currently undergoing normal acceptance testing by the retailer. Importantly, this retailer's commitment to their customers and their belief that our solution will help protect those customers remains unchanged. We look forward to partnering with them in the months and years ahead. April is a busy month in the gift card industry as both large gift card networks host summits enabling their ecosystems to coordinate ahead of the holiday season. As a result of these summits as well as many other meetings, including an event at our headquarters attended by representatives from two very large retailers and a leading program manager, we are now advancing rollout plans with 15 North American retailers, including eight of the 20 largest. As measured by sales, this represents a meaningful increase in both metrics since our Q4 call only two months ago. This momentum is being driven not only by us but also by key industry participants and in the last few weeks alone we have heard about retailers proactively engaging with major brands to encourage their adoption of our solution as well as with other retailers to increase incentive for widely sold brands to speed their adoption. Similar momentum building actions are being undertaken by the networks and key brands and we are focused on orchestrating the multiple moving parts to ensure initial rollouts proceed as quickly and excellently as possible. As discussed on our Last call in Q1, we we closed our first secure gift card commercial order representing over $500,000 of Annual Recurring Revenue. This order included gift cards from six closed loop and open loop brands. Just as we are on the retailer side, we continue to expand our number of brand engagements including some of the largest open loop and closed loop issuers comprising both third party and first party opportunities. In addition to being a large market itself, we have discussed the value we see in secure gift cards opening opportunities in the much larger retail loss prevention market. Lighting up retailers for our gift card solution provides us a key technological footprint as our software will be widely distributed across our front of store scanners. It also creates digimarc champions in both operations and loss prevention, two teams that often have competing priorities and where we stand out with our ability to deliver value to both. This unique position should aid us in cross selling additional solutions into our retailer customers as well as provide us differentiated and invaluable voice of market for the advancement of new solution candidates. We are already seeing encouraging signs that provide validation of this strategy. Multiple retailers have expressed an early interest in our product swap prevention solution, including one very large retailer who in addition asked about our ability to solve another problem. They and the industry are facing counterfeit coupons without losing focus on the opportunity immediately in front of us. We are excited to engage further across all these opportunities including the exploration of this new potential solution for counterfeit coupons as we believe our work in product authentication provides us a valuable foundation upon which to build. Turning now to product authentication Annual Recurring Revenue from Our anti counterfeiting solution continues to grow, driven by customer upsell and new customer wins. Brands face rampant counterfeiting and IP theft with bad actors advancing their technology and processes to replicate packaging and security features with alarming accuracy, something made ever easier by the advancement of AI. Decentralized supply chains and omnichannel sales make counterfeit detection more difficult, putting brands in a reactive position against emerging threats. Many security measures require trained inspectors and specialized tools, limiting accessibility, increasing costs and reducing scalability. Digimarc's secure and scalable, covert and connected proactive solution provide superior results when compared to competing analog solutions such as tags, codes, inks and labels. We closed three upsell deals with existing customers of our anti counterfeiting solution in Q1. These brands represent leading companies from different industries, pharmaceuticals, food and beverage and consumer goods, highlighting the wide applicability of our solution across many different verticals. We are fortunate to have some of the largest and most well known companies in the world as valued customers. As we have repeatedly stated, when we solve our customers most challenging problems, expect to benefit from the further upsell and cross sell revenue generation for a long time. Turning now to digital trusted integrity, we continue to execute against this large and greenfield opportunity. Problems of trust and integrity in the digital domain existed prior to the advent of AI, but AI has created new ones while making prior ones worse and or harder to solve. The work of C2PA has created wide awareness that our technology addresses many of these problems and our history, our credibility, our expertise, our experience and our first to market with and co leadership of the digital watermarking component of the C2PA standard are all coalescing. To ensure we are well positioned to surf this ever growing wave. We secured a six figure upsell with the global technology company that has adopted a leak detection for web content solution we discussed on our last call. We progressed discussions with the important industry trade group we have previously mentioned that is searching for an industry wide solution to a problem they previously felt unsolvable. As a result, we expect to soon enter direct conversations with the leading companies in this industry regarding our ability to help them solve this and other problems made worse by the advance of AI and we're seeing engagement with US Government innovation programs. Digimarc has been included as a potential participant in the Softworks Field 4 technology sprint, an early but tangible sign that our technology is relevant in contested mission critical environments. Touching quickly on product innovation in the large and rapidly evolving digital trust and integrity space. We are progressing a natural extension of our trust layer strategy that directly aligns with our existing IP and operating history and addresses a critical unmet need for scalable autonomous AI. While the ultimate direction in how we attack this opportunity is being shaped by real time industry engagement, the idea that enterprises will require an ultra scalable way to verify what is real, authentic and authorized as AI systems become more autonomous is gaining widespread acceptance and providing an ultra scalable way to verify what is real, authentic and authorized is an area we believe we have a unique right to win. Agents act at machine speed, negotiating, transacting and moving information without any human review. This not only increases the attack surface, it makes the agents themselves part of that surface. Existing software security architectures were built on the underlying assumption of human involvement, a premise that is rapidly eroding as agents shift from content creation for human review to to truly autonomous action. Technology must replicate human experience and judgment or autonomous utility will remain constrained by limitations placed on the tasks they are entrusted to undertake. While we are focused on our authentication use cases, we continue to support identification use cases that could drive future growth. We are advancing our position in these longer term strategic areas and are confident in our ability to win when the time is right to pursue them. The Belgian and German market demonstrations of our recycling solution remain on track and we are eager for their results. We believe these live cradle to rebirth activities will result in the production of new fractions of PCR feedstock that is not possible using current sorting technologies, providing tangible proof of our solutions ability to, among other things, create new end markets for recycled plastic. As a reminder, we believe this capability is crucial to the industry's ability to comply with the sunrise of the EU's packaging and and packaging waste regulation. We have also closed two upsell deals with existing Engage customers, one in Q1 and another already in Q2. I will now turn the call over to Charles to discuss our financial results.

Charles Beck (Chief Financial Officer)

Thank you Riley. Ending ARR for Q1 was 15 million compARRed to 20 million for Q1 last yeARR. The decrease reflects the previously disclosed loss of two customer contracts in 2025 which accounted for 6.8 million of ARRrangements. Excluding these two items, ARR grew 1.8 million yeARR over yeARR which included 500,000 of ARR from gift cARRds in Q1 this yeARR sequential ARR growth was 9%. Looking ahead, we still expect to deliver significant ARR growth in 2026, although the composition of that growth has changed as a result of the scanner delays Riley mentioned, we no longer expect gift cARRds to be the lARRgest contributor. This is purely a result of timing of initial rollouts as opposed to our conviction in the opportunity. There is tangible mARRket pull for our solution and the level of retailer, brand and gift cARRd network engagement has meaningfully increased. Total revenue for Q1 was 7.6 million, a decrease of 1.8 million from 9.4 million in Q1 last yeARR, with the change equally split between subscription and service revenue. Subscription revenue, which accounted for 58% of total revenue for the quARRter, decreased 900,000 from 5.3 million dollars to 4.4 million dollars excluding the impact of the two contracts I referenced eARRlier, which accounted for $1.5 million of subscription revenue in Q1 last yeARR. Subscription revenue would have increased $600,000. Service revenue decreased 800,000 from $4.1 million to $3.2 million. Service revenue in Q1 last yeARR included 500,000 of revenue from Holy Grail 2.0 recycling projects compARRed to none this yeARR. We don't expect further service revenue from Holy Grail 2.0 as that program has ended and HolyGrail 2030 is focused on deploying end to end mARRket demonstrations. Subscription gross Profit mARRgin was 90% for the quARRter, 4 points higher than Q1 last yeARR, lARRgely reflecting lower subscription platform costs. We continue to drive down our platform costs which yeARR over yeARR ARRe now down 300,000. Service gross profit mARRgin was 57% for the quARRter, down 8 points from 65% in Q1 last yeARR. The decrease was due to an abnormally favorable mix of revenue and costs in Q1 last yeARR. Service gross profit mARRgin has routinely been in the high 50s. Operating expenses were $11.7 million for the quARRter, down $6.5 million or 36% from $18.2 million in Q1 last yeARR. The lARRge decrease reflects $7.4 million in lower cash compensation costs due to lower headcount and $3.2 million in severance costs incurred last yeARR, lower consulting costs of $500,000 and lower softwARRe and hARRdwARRe cost of $300,000. These cost savings were pARRtially offset by higher onetime legal and other costs of 1.2 million related to the corporate reorganization and 500,000 higher stock compensation expense. While we continue to be vigilant, pursuing ways to operate more efficiently and effectively to ensure that we ARRe maximizing the return of every dollARR we spend. As mentioned on our two prior calls, we ARRe increasing our overall investment in the business to support the growth ahead. Non GAAP operating expenses, which exclude non cash and non recurring items, were $8.1 million for the quARRter down $8.4 million or 51% from $16.5 million in Q1 last yeARR. The lARRge decrease reflects aforementioned lower cash compensation, consulting and softwARRe and hARRdwARRe costs. Net loss per diluted shARRe for the quARRter was $0.32 versus $0.55 in Q1 last yeARR. Non GAAP net loss per diluted shARRe for the quARRter was $0.07 versus $0.40 in Q1 last year. Regarding cash flow, we ended the quarter with $10 million in cash and short term investments with no debt. We used a little under $2 million in free cash flow and $900,000 to buy back start buy back stock as part of our employee stock program. The Stock buyback of 169,000 shares was higher than in recent quarters as more shares typically vest in Q1 than in any other quarter. Due to the timing of our annual compensation cycle, free cash flow usage improved 3.7 million from Q1 last year. The improvement was despite a headwind to revenue and an unfavorable change in working capital and other activity of 3.4 million year over year. The change in working capital was largely due to the timing amount of cash receipts and payments. Reiterating what I've shared previously, working capital can swing significantly quarter to quarter based on timing, which is why we believe that non GAAP net income or loss is a better proxy for normalized free cash flow. Our non GAAP net loss improved 6.9 million or 81% from 8.5 million in Q1 last year to 1.6 million in Q1 this year. As a reminder, in Q1 each year we incur roughly 500,000 of costs related to public company year end expenses. Excluding these costs, our Q1 non GAAP loss would have been 1.1 million. For further discussion of our financial results and risks and prospects for our business, please see our Form 10Q that will be filed with the SEC. Before I wrap up, I did want to mention that we will be attending two upcoming investor conferences. The first is Needham, which is tomorrow, and the second is Oppenheimer, which is in mid August. We will keep you all informed of any investor conferences we plan to attend. Also, we expect to finalize our new corporate structure, which was approved by shareholders on or around May 16th. The new corporate structure will result in a CUSIP change. Our transfer agent, Broadridge, will be contacting investors directly on how to exchange shares. I will now turn the call back over to Riley for final remarks.

Riley McCormick (Chief Executive Officer)

Thank you, Charles. In the wake of the relentless acceleration of AI models and agents a vacuum of trust and authenticity is being created. Trust is fast becoming the only currency that matters and the future will belong to companies that make that currency scalable. We believe digimark is ideally positioned to lead that charge. We are focused on delivering a future where humans and intelligent systems alike can verify what's real, protect what matters, and move forward with confidence. Spanning across both the physical and digital worlds, we are building the trust layer for the modern world, a foundation that is needed now more than ever and is emerging as a significant opportunity we were created to lead. Digimarc's capitalizing on the convergence of key trends driving increased demand for our solutions. Positioning ourselves as one of the select software companies to benefit from, not be a casualty of the relentless advance of AI, we grew ending AR 9% sequentially while expanding our subscription gross margin 400 basis points year over year. We are advancing our secure gift card solution by aligning key industry partners as we progress towards widespread adoption of our solution. We signed our first commercial order and are progressing initial rollout plans with 15 North American retailers, including 8 of the 20 largest as measured by sales, a significant increase in both metrics since our last earnings call only two months ago. ARR from our anti counterfeiting solution continues to grow driven by customer upsells and new customer wins. In Q1 we secured three upsells from existing customers representing leading companies from three different verticals. We continue to execute against the large opportunity in the exciting and greenfield digital trusted integrity space, securing a six figure upsell with a global technology company, advancing engagement with important force multipliers and progressing a natural and exciting extension of our trust layer strategy that directly aligns with our existing IP and operating history and provides a critical unmet need for scalable agentic AI. We added key talent across go to market functions including two accomplished sales leaders and we continue to be well positioned to address very large problems outside of our current focus areas when the markets are ripe. We are eager for the results of the two upcoming end to end market demonstrations of our recycling solution as we believe they will show our ability to help the industry comply with the sunrise of the EU's Packaging and Packaging Waste Regulation. Stacy will now open up the call for questions.

OPERATOR

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star Keys. First question comes from Jeff Van Ree with Craig Hallam. Please go ahead.

Daniel

Hey, this is Daniel on for Jeff. Thanks for taking the questions. Riley and Charles on the rollout plans with 15 North American retailers. Just to be clear on that, is this at the point where they are vetting the solution or they actually so far as to indicate that they're all planning fully on buying. They're just refining how and when they roll out just any color on or maybe you could split it up into several buckets in terms of the stages of those prospects, but any color on where those 15 are in the process.

Riley McCormick (Chief Executive Officer)

Yeah, of course, Daniel. So obviously we're talking to more than 15. The 15 that we mentioned on the call is that we're advancing rollout plans and it's a mix. It's initial rollout planning to weekly execution calls and on site visits to even some limited in store testing. And in addition, besides the more direct I mentioned, we're talking to more than 15 beyond just these conversations we're also having, we're hosting broader industry events, whether they be virtual meetings or events at our headquarters, providing venues for multiple retailers and brands to not just talk to us but talk to each other about how we really drive fast and light adoption.

Daniel

Okay, that's helpful. That definitely puts some meat on the bones there. And then on the anti counterfeiting customers, the three that upsold, is there any common patterns you can point to in terms of what's driving those upsells, Whether that's the level of technology that they're embedding, where you're seeing customers coming in and typically embedding more technology, or that's the sort of natural flow of the life of the customer where they're scaling the deployment up or pricing changes. Just anything you can call out about what's driving that, especially any commonalities in the business?

Riley McCormick (Chief Executive Officer)

Yeah, it's a mix. Sometimes it's adding new brands, sometimes it's adding new geography, sometimes it's adding new functionality. So it's a mix across all of those metrics.

Daniel

Okay, that's helpful. And then last of all, just in regards to Schnucks, just any additional thoughts on how that rollout is pacing relative to expected and then just anything else on the feedback you're hearing there?

Riley McCormick (Chief Executive Officer)

Yeah, it's underway. That's all we really want to say at that point. But we truly value them as a partner, as our initial retailer partner. You know, those cards have been in store so they're expanding to all of their stores, but they've been carrying cards at 15 stores. Initially it was 10. They added another five stores a couple of months ago. And they're very happy with the solution, and we're really thrilled with them as a wonderful partner.

Marlene

Fair enough. Thanks, Marlene.

OPERATOR

Once again, if you would like to ask a question, Please press star 1 on your telephone keypad. I would like to turn the floor over to Riley for closing remarks.

Riley McCormick (Chief Executive Officer)

Okay. Well, thank you, everyone, for dialing in today's call. We hope you have a wonderful rest of your day and look forward to seeing some of you tomorrow. Have a great night.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.