Greetings, and welcome to the Digimarc Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host. Joel Meyer, Chief Legal Officer. Thank you, Joel. You may begin.

Thank you. Welcome to our Q4 conference call. Riley McCormack, our CEO; and Charles Beck, our CFO, are with me on the call. On the call today, we will provide a business update and discuss Q4 and fiscal 2022 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 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. Riley will now provide a business update.

Thank you, Joel, and good afternoon, everyone. 2022 is a transformative year for our company. In a bit, Charles will review the financial highlights for the year. I want to spend time on the strategic highlights and how they position us in 2023 and beyond. As you all know, we generate revenue through 2 primary markets: government and commercial. On the government side, we re-signed our contract with the consortium of the World Central banks 2 years before expiry, extending it out through the end of the decade. We take great pride in our work to deter global currency counterfeiting and are excited to continue our work with our long-standing and deeply valued customers, the central banks. Moreover, this program is a wonderful testament to the power of our technology, our scalability and our trustworthiness as a partner, not to mention our ability to build and support a massive mission-critical, multinational and multi-stakeholder system, similar to what we are doing in recycling. On the commercial side, we closed on our acquisition of Everything, launched our first products, announced our first major value-added reseller or VAR, repeatedly and publicly proved our ability to make a real impact on the global plastic problem and signed a multiyear deal with Walmart for an exciting new use case, further strengthening our relationship with the world's largest retailer. We have combined our digital watermarking and product cloud capabilities to form the Digimarc illuminate platform, and on top of that platform have built 4 products: Digimarc Engage, Digimarc Validate, Digimarc recycle and Digimarc retail experience. We also continue to progress product candidates along the rigorous process that all must endure to become launch products, including intense market research to ensure they address large and growing problems and that eliminates functionality upon which all of our products…

Thank you, Riley, and hello, everyone. As we reflect back on 2022, there were a number of strategically important accomplishments to note, as Riley just highlighted, and there were also some important financial developments during the year I want to highlight before I dive into Q4 numbers. First, we delivered 85% year-over-year growth in first year commercial bookings with bookings of $19.1 million in 2022. As a reminder, the commercial market is our largest area of focus given the enormous opportunities we are uniquely positioned to address. If you exclude our piracy Intelligence product, which we have now completely sunset, our commercial bookings growth was even higher at 160% year-over-year. Second, we delivered 32% growth in subscription revenue year-over-year, with subscription revenue of $15.2 million in 2022. For the first time in a decade, subscription revenue accounted for over half of our total revenue, which is notable given the sale of our software subscription products is not only our most important product focus, but also our most profitable. We earned roughly 80% incremental margins on our software products right now with the potential to increase that to more than 90% at scale. If you exclude piracy Intelligence, our subscription revenue growth was even higher at 77%. Third, while service revenue was flat year-over-year at $15 million, we expect service revenue to be higher in 2023. As a reminder, the majority of our service revenue comes from software development services we provide to the central banks. With the early extension of our contract with the Central Banks, which now runs through the end of 2029, we expect services revenue from that contract, which was $12.9 million in 2022 to be up over 10% in 2023. Now as promised, I'll dive deeper into our Q4 results. First year commercial bookings were $10…

Thanks, Charles. 2022 set the foundation for the years ahead, and we are excited to continue to build upon that foundation in 2023 and beyond. We are seeing momentum across all areas of our business and our hard at work continuing to increase that momentum as we create a market we are uniquely positioned to lead for years to come. A market that at scale has the opportunity to be as large, if not larger, and the other legs of the digital transformation stool. There are trillions of items produced per year, and our goal is to sell multiple Digimarc products into each of them, adding exponentially accretive value as we digitize the world's products. Operator, we will now open the call up for questions.

[Operator Instructions]. Our first question is from Jim Ricchiuti with Needham & Company.

I'm wondering if you can elaborate of the recycled product comments that you made. Riley, the question -- let me see if I can phrase it this way, maybe you'll be able to help. Would you be surprised if we're into the second half of this year, and there's still this relative lack of publicity that you're alluding to particularly in light of some of the restructuring actions you've announced. I'm wondering if there is still the difficulty of predicting when the timing around when this -- the product gets traction in the market?

You're talking about recycle or retail experience?

I'm sorry, the -- not the retail experience product.

I don't -- Jim, the one thing I got to say, one of the wonderful things about top-down drivers are top-down drivers. So one of the downsides of that is we're not going to complete control. I wouldn't confuse publicity and a broader talk about -- I wouldn't confuse that with activity or there being a lack of activity or real intent. That's all I'm going to say. This is -- I think we mentioned on our last call that -- the new contract we signed with Walmart is a powerful anchor for this product. I think if you go to our website and look at this product, you'll understand, I'll just leave it that. It's in our best interest to work with the industry at the pace they want to go on all things, including publicity. But again, I would not mistake publicity for activity.

Does the pace at which the retail industry is moving though. Does that have any relation just in light of some of the actions you're taking to ensure that you can get to profitability sooner rather than later. I'm just wondering if there's any connection there may not be I just.

Are you saying what -- was there a headcount reduction related to our belief in the inflection of our business?

Timing around it being uncertain.

Yes. No, no. I think both Charles and I went out of our way to call that out. I think Charles was phrase number of business confident or increasing confidence, and I said this has nothing to do with either the people impacted or our beliefs in anything. So no, they were not related.

And then just with respect to the recycle, take recycle product. Is there -- you can, I think, talk a little bit more freely about this. Is there -- in your mind, is there a time line as to when this large SAM begins to convert into revenue opportunities. Yes, something along the lines of what you highlighted.

Yes. I mean, we -- there's -- in France, we talked about -- there was a public meeting where a large CPG committed to getting going at scale, and we're in conversations with other people. We're still early in 2023. So I would be hopeful that, that happens this year. And then same with Canada, I mentioned, stay tuned shortly there should be some ties out relatively shortly in Canada.

Okay. It does sound like you're expecting a decent amount of news flow over the balance of the year.

Absolutely.

Our next question is from Jeff Van Rhee with Craig Hallum Capital Group.

This is on for Jeff Van Rhee. First question, just on the workforce reduction, what was the timing on that was that in Q4 here? Or is that layering in, in Q1 just for thinking about whether or not that's already reflected in this quarter's numbers or how much of a quarter of that is reflected in this quarter's numbers?

It happened mid-February. So we'll have 1.5 months of kind of regular spend in Q1 before the action took place. And then we'll have about $1.5 million of cash costs in Q1 related to this event.

Okay. And then on -- so on that $7.4 million of annual cash savings, that's all in relation to that workforce reduction? Or is there other pieces and parts?

That is all related to the workforce reduction.

Okay. And then on the Walmart new use case that we were talking about last quarter, you talked here on the call about the soft launch of retail experience. I don't know if that was suggesting. That was what the Walmart use case was. But just if you could update us on where we're at with Walmart and then what the current thinking is on when we would hear about what that use case is?

So on the latter, that's up to them. What do you mean by updating you on where we are with Walmart? I don't understand the first part of your question.

I just mean in terms of rollout in terms of usage at Walmart in terms of when we might hear about what the use case is just all of the above? Anything that can be shared about that.

Yes. I'll just repeat what I said in the call, which is it's our best interest to work with the industry on this. So that's up to them. But again, important to make clear that just because you don't know about it doesn't mean there's an activity going. I don't know me that just mean in general, right? I don't think any of our partners are necessarily messaging to all they're taking care of their own business. So when Wall Street finds out about it may be at a very different time than when important other stakeholders find out about.

Okay. And then just last of all. On the service revenue and the year-over-year decline in Holy Grail. Just maybe talk us through that? What was driving that decline? And then maybe what are the current expectations for Holy Grail moving forward? I know France being the pilot project there, but just any other thoughts on how we should think about that service revenue going into.

Yes. So this has nothing to do with Holy Grail. I mean there's a lot of the same stakeholders involved, right? But Holy Grail, there was -- it was a Phase III trial and we got service revenue as part of that. That's a lumpy onetime service revenue. We're not -- you heard Charles say, our focus is on subscription. That is where we're going to be at 80% gross margin next year with growth from there, which is incredible in terms of just versus the SaaS universe, right? So our focus is on subscriptions. But we provided along with some really small licensing revenue to Holy Grail for this pilot that was Holy Grail grilled was services work. So there was just the timing of that different phases, Phase I, Phase II. I don't -- I mean, for a couple of years, there's been Holy Grail services work. But our goal would not be to have a bunch of Holy Grail services where we want to sell Digimarc services. That's the focus.

[Operator Instructions]. Our next question is from Matt Collard with PCB Advisory [ph].

Charles. Congrats on a strong year in '22. You introduced in your comments, Riley, about the value-added reseller. And I guess, I just wanted to understand, do we think of that? Or should we think of that as a license at the individual product level in terms of? Or is it the platform level?

Platform level. So Digimarc Illuminate is our platform. We're using that in 2 ways. We are building our own products on top of that. Those are the 4 products we talked about. We have other product candidates that we're working on. That's what we sell direct, right? But we also believe -- and I think I mentioned this in the call is going to be 2 calls ago, we also are licensing that platform to value-added resellers to build their own products and services on top of it. And it's just like any other hyperscaler type model where the more capacity they use, the more they pay us. And there's 3 wonderful things about it, I guess. The first is its highly scalable and high-margin revenue, right, as our value-added resellers are out selling whatever products or services they built upon Illuminate, that's them doing all that work and as they need more capacity, they got to license more from us. So that's one. Secondly, it's digitizing more and more of the world's products using our technology. It's a win-win-win. It's a win for us. It's a win for the VARs and it's a win for the end customers. There's cross-sell and upsell between that. We're building a lot of technology companies that are both platform and product that can get to channel conflicts. We're actually creating a triple win with the way we're going to market. And then the third thing is we are never going to have all the best ideas in the world. And so by letting value-added resellers make use of our platform to come up with other solves, it's wonderful.

Got it. Okay. All right. And then also, I appreciated the comments because we're obviously excited about some of the potential new product candidates. So I appreciate the insight into the new product candidate process, if you will. I guess the question would be are any of the new product candidates that you're kind of referencing top-down drivers? Or would you consider those also top-down drivers of product digitalization? Or are they more -- I don't want to use the term bolt-on, but I will because I can't think of anything else.

Yes. You could say accretive products, maybe bolt-on accretive. Yes, they're both. I mean there's a reason -- here's the reality, right? And Matt, we've had this conversation. I'd like to I never -- I want to be careful what I say because there's still uncertainty. And when there's uncertainty, I want to call it out, they're product candidates for a reason because we are not guaranteeing right now, they're going to be some products. If we knew they were going to be products, they would be products, right? So with that caveat said, absolutely. There's a reason why I talked about how we what we prioritize in the product candidate road map because those are really powerful, right, that having either a top-down driver or a network effect or some other forcing function is an incredible tailwind to have to a product as opposed to your word, bolt-on, as just another product. So absolutely, there is -- you picked up on it. I think that's -- that's why I talked about how we prioritize some. So there are -- there is a mix in our product candidate pool of both single products, kind of dissolving discrete problems that help us digitize the world's products, one problem at a time. but there's also some top-down forcing function network effect products in there. And when the time is right, when we can talk about it, we'll make sure we talk about them.

There are no further questions at this time. I'd like to hand the floor back over to Riley McCormack for any closing comments.

Well, thank you, everybody. We appreciate your time. Have a great rest of your day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.