Good day, and welcome to the Digimarc Q3 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I’d now like to turn the conference over to Mr. Joel Meyer, the Chief Legal Officer. Please proceed, sir.

Thank you. Welcome to our Q3 conference call. Riley McCormack, our CEO, and Charles Beck, our CFO, are with me on the call. On the call today, we will discuss Q3 financial results and provide a business update. 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 will archive this webcast there. 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. Charles will now comment on our Q3 financial results.

Thank you Joel, and hello everyone. First year commercial bookings were $3.2 million during the third quarter compared to $2.9 million in Q3 last year. Bookings in Q3 last year included $600,000 from our Piracy Intelligence product that we are nearly complete in winding down. There will be no future bookings from this product category. Excluding Piracy Intelligence, our first year commercial bookings increased $800,000 or 35%. Bookings for the quarter included $1.2 million from a new multi-year agreement we signed in Q3 with Walmart. The new agreement provides for a minimum payment of $2.7 million in year one, and more than doubles to $5.8 million in year two. These minimum payments are incremental to the $3 million annual payments we receive under the existing agreement. We expect the remaining contract value of $7.3 million to be booked in the fourth quarter upon receiving customer acceptance. Riley will have more to say about this exciting new development later in the call. Revenue for the third quarter was $7.8 million, up 22% from $6.4 million in Q3 last year. Subscription revenue grew 64% in the quarter from $2.5 million to $4.1 million. The new Walmart contract provided for $1.1 million of subscription revenue during the quarter. We expect a similar quarterly revenue run rate for this contract over the next seven quarters with potential upside above the minimum payments. Beyond the Walmart contract, there are two offsetting factors impacting our year-over-year growth, the addition of subscription revenue from EVRYTHNG, offset by the decline in subscription revenue from sunsetting our Piracy Intelligence product. The impact of sunsetting this product on the quarter was in line with our expectations of $600,000 less revenue than Q3 last year. There will be a similar year-over-year variance in the fourth quarter. Excluding Piracy Intelligence, subscription revenue…

Thanks, Charles. We made progress on many fronts in Q3, but without a doubt, the highlight of the quarter was the deal we signed with Walmart covering an expanded deployment of the Digimarc Illuminate Platform. I’m confident you all have many questions about what exactly we are doing with Walmart and what new use case will be powered by this expanded deployment of our platform capabilities. Please know that we are equally eager to discuss this incredibly exciting development, and plan to, when the time is right. Until then, there’s just not a whole lot more we can say besides, stay tuned for more details in the not-too-distant-future. I do want to spend some time framing the opportunity ahead of us as best as I can. And perhaps the best way to do that is to describe the opportunity sets in terms of the Serviceable Available Markets or SAMs, which in this case refers to the size of the opportunities immediately available to us as a result of this deal with Walmart, and the Total Addressable Markets or TAMs, which refers to the size of the opportunities that exist for Digimarc beyond the scope of this deal as a result of this new use case. First, I want to touch on the SAM and the TAM for the new use case of our platform capabilities. As Charles mentioned, our deal with Walmart is structured so that the payment of $5.8 million in the second year is more than twice as large as the payment in the first year of the deal. It is important to note that even at the end of year two, there are still multiples of upside remaining before we reach full penetration at Walmart. Hence the SAM, as represented by full penetration of this use case…

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] First question comes from Matt Collard from PCB Advisory. Please proceed with your question, Matt.

Hey, Riley. Congrats on to you and the team on the overall progress and the Walmart deal in the quarter. A lot is being made about the digital twins strategy in this tech landscape, and you recently highlighted a McKinsey interview on the topic. I wanted to know how is the evolving digital twin definition or understanding, shaping or framing your conversations with your customers or soon to be customers.

Yes. Hey, Matt. It’s a great question. We started calling what we have digital twins when we close the acquisition of everything. And what was so interesting about the McKinsey article, it was the first time or I guess an interview or a podcast. It was the first time that a major group and obviously McKinsey, I don’t think anybody has called these an introduction to McKinsey, but started referring to the term as we do. So a digital twin is just a digital representation of an item, but for the last couple years, the industry has been talking, normally using that term to mean a complex system like a factory floor or oil refinery, something like that. Products deserve digital twins too. And so there’s a lot better understanding of what we’re doing, right? Product digitization is a still pretty early in terms of people really understanding the value. So we talked about when we announce the Everything acquisition, which is everybody understands the value of ERP, right? I mean, that’s a massive market. Everybody understands the value of CRM. That’s also a massive market, but the items that are produced that go from the enterprise resources and go to the customers, those two need to be digitized in order to reach true digital transformation. And the fact that McKinsey and there was actually Gartner has now started talking about what they call discrete digital twins, which is what we do. The fact that these massive thought leaders are coming around and seeing things the way that that we see it, it just helps drive clarity, right? So we don’t need to spend and we’re still early even in their driving clarity, right? But as the analysts picked up this term more and more and start talking about the world the way that we see it, we don’t need to spend the first 20 minutes of a conversation with a customer or a prospect talking about what is exactly what we do. We can say, we’re the leading digital twin company. Let’s talk about our products. So it’s a wonderful unlock. It’s a wonderful validation of what the team’s done here. It was just excited to see – it was exciting to see it.

Great. I appreciate the explanation. I’ll jump back into the queue.

Awesome. Thanks, Matt, and thanks for the kind words to beginning too.

Thank you. The next question comes from [indiscernible], who is a private investor. Please proceed with your question, Martin.

Congratulations on the Walmart pump.

Thanks, Martin.

All right. To be clear, you think that alone could be $100 million in revenue annually with Digimarc, you said nine figures.

I’m sorry, hard time hearing you.

To be clear, you think the Walmart deal alone could be nine figures, a $100 million a year in revenue.

No. What we said is the SAM, so at $5.8 million, which is the second year of the Walmart contract, there’s still multiples left of before we reach full penetration of Walmart. So we haven’t defined exactly what that means, but there is upside from the $5.8 million just from the Walmart deal. But then we also talked about -- I’m sorry.

Nine figured, I’m trying to get my head around $100 million.

So the total addressable market. So we are licensing our platform to Walmart for undisclosed use case. We – that same use case outside of Walmart, that’s what we were talking about could be the nine figures, not with Walmart, correctly.

I understand. Last question, if you don’t mind, before this takes off, have you had any discussions about taking your company private?

No.

No. Excellent. All right. I look forward to writing this rocket ship with you.

Okay, thank you. The next question comes from Jeff Bernstein from Cowen. Please proceed with your question, Jeff.

Hey, Riley. So congratulations on the deal, and I guess this is the application that you talked about sort of having to have the impetus from the other party to get done. And so maybe you could confirm that.

Yes. So we’ve been talking about a top down driver product digitization. What we said was the ultimate timing of the release of that product is outside of our control. And what we said today is that the deal we signed with Walmart is a very powerful anchor in the launch of that new product.

Got you. And then I just wanted to understand the particulars a little bit and you have talked about this in general terms previously. So there’s an application here that Walmart is going to license your platform for. There’s going to be an impetus for their supply chain partners to utilize Digimarc barcode in order to facilitate Walmart’s development of that capability. There may be other Walmart type customers for that application and they may have the cooperation of their supply chains that would then need to adopt Digimarc Barcode as well and that constitutes the kind of entire TAM available.

Jeff, I understand why you’re asking. I really don’t want to talk about this. I mean this is as we said, we take customer confidentiality very seriously. But let me try maybe if – maybe try another way, right? Which we are – we have signed a deal with Walmart for the access to our platform, okay? That is the deal we announced today. There are other people in the world who could benefit from this use case outside of the Walmart, right? So that’s the SAM and the TAM on the platform side. We are about to launch a product which will benefit from a top down driver of product digitization and this deal that we signed with Walmart is a powerful anchor and that’s all I’m comfortable saying that’s all I really want say right now, Jeff.

That’s great. That’s great.

But important, I think the immediate opportunity here is even in the second year of this contract, we are not fully penetrated at Walmart and...

Understand.

The new product we will launch has TAM – an undisclosed TAM, but we were trying to give some ballpark figures, which is the immediately addressable opportunity for the new product by itself is enough to take us to profitability as a company.

Yes. Understand. That’s great. And then I had two quick other questions for you around some things going on with GS1. They’ve got this new global location numbers sounds like it’s something that would be very positive for everything applications as well as a program sunrise 2027 to make sure that POS systems at retail can handle 2D barcodes. Can you just touch on those for a minute?

Yes. Well, so first of all, the second thing you’re talking about is Digital Link, which everything was a big part of writing that standard. And so something we welcome. And in general, we’re big fans of GS1, but GS1 allows is for the global industry to trade with each other, right? And so the easier that is, the more standards that are built so that the supply chain can work, the more we’re going to benefit as a product digitization company. So we’re big fans of everything that that GS1 does. But specifically, the last thing you’re referencing this 2027 sunrise, that’s a standard called Digital Link. And that’s something that everything actually was a one of the big – was heavily involved in crapping that standard.

Great. Thank you.

Thank you. [Operator Instructions] The next question comes from Jeff Van Rhee from Craig-Hallum Capital Group. Please proceed with your question, Jeff.

Hey guys, this is Daniel on for Jeff Van Rhee. Yes, very exciting to hear about the Walmart deal. Just interested, on the first and second year, maybe I missed it, but just understanding when these years fall, I assume, are we talking fiscal years? So fiscal year 2023, fiscal year 2024, are we talking years starting now here from Q3? Just what do we mean by first and second year?

Yes, it’s starting as a Q3, so it’s a term of the contract. The first year of the contract runs from Q3 to Q2 and then the following year, the same time period.

Okay. Great. That’s helpful. And then on everything, just looking at the numbers and sequential year-over-year – excuse me, if I understand correctly, is everything running around $1.3 million first, is that correct? And then second, how is everything integration going and how is that in terms of meeting expectations?

Yes, so I’ll handle the second part. I’ll turn it over to Charles for the first part. The integration is great, the integration is complete. We had internal target we’re calling Day Alpha [ph], which is each functional group, a functional group went through at the close of the acquisition and said, what is the list of things that we need to do to be operating as one company? And we achieved that in Q3. I was probably a highlight, I should have included my transcript. But the – we set out a goal, I said something internally when we announced the acquisition that myself and some of the Digimarc leadership team were over in London. And I said, my goal is that a year from now, nobody will remember what name was on their business card a year ago. And it’s – we are one team. We are one company. So the integration is – has – it’s in the rear view mirror and it’s going great. And Charles, you want talk about, I think maybe we’re talking about subs – we talking about the $1.3 million number you’re talking about?

Yes. So we’re intentionally not breaking that out because we’re selling a combined product now. So you can kind of do some backend math to say what it might kind of be, but we’re selling a combined product, so there’s no way to really allocate that out. So we’re not reporting individual everything, revenue and bookings numbers.

Yes. And one thing I keep in mind is you’re trying to do that math is you can imagine everything had non-U.S. dollar exposure. And so as you’re looking, what’s happened to the dollar versus every other currency to strengthen since the beginning of the year? So that’s been a headwind to that number as well.

Okay. Thanks. That’s all I had. Thanks for taking my questions.

Yes.

Thank you. This concludes our question-and-answer session. I’d now like to turn the conference over to Riley McCormack for closing remarks. Thank you, sir.

Well, thank you, Claudia, and thank you everybody for dialing in and we look forward to speaking with you again soon. Have a great rest of your day. Bye.

Thank you. The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect your line.