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Edited Transcript of DMRC earnings conference call or presentation 30-Oct-19 9:00pm GMT

Q3 2019 Digimarc Corp Earnings Call

Beaverton Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Digimarc Corp earnings conference call or presentation Wednesday, October 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce L. Davis

Digimarc Corporation - President, CEO & Chairman

* Charles Beck

Digimarc Corporation - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Jeffrey Lee Van Rhee

Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst

* Jeffrey M. K. Bernstein

Cowen Inc. - VP

* Robin Knipp

Janney Montgomery Scott LLC - VP of Wealth Management

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Presentation

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Operator [1]

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Good afternoon and thank you for participating in today's conference call. Now I will turn the call over to Bruce Davis, Chairman and CEO of Digimarc. Mr. Davis, please proceed.

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [2]

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Thank you. Good afternoon. Welcome to our conference call. Charles Beck, our CFO, is with me. On the call today, we'll review Q3 financial results, discuss significant business developments and market conditions and provide an update on execution of strategy. We have posted these prepared remarks in the Investor Relations section of our website and will archive this webcast there.

Please note that we may make certain forward-looking statements on this call and in the prepared remarks we filed with the SEC and posted on our website under the heading Safe Harbor Statement regarding revenue recognition matters, results of operations, investments initiatives, perspectives on business partners, customers, prospects, industry trends and growth strategies.

We also will discuss from time to time information provided to us by channel partners and actual and potential customers. We are providing this information as we understand it was represented to us. We do not verify nor vouch for such information. All such statements and information are subject to many assumptions, risks, uncertainties and changes in circumstances. Any assumptions we share about future performance represent a point-in-time estimate. Actual results may vary materially from those expressed or implied by such statements. We expressly disclaim any obligation to revise or update statements or other information that we provide during this call to reflect events or circumstances that may arise after the date of the call.

For more information about risk factors that may cause actual results to differ from expectations, please see the company's filings with the SEC, including the Form 10-Q that we will file shortly. Any links included in our prepared remarks are provided for general information and context only. The content referenced is not incorporated by reference, and you should not consider it part of this presentation. We do not verify nor vouch for such information.

Charles will now comment on the financial results; then I'll discuss significant business developments, market conditions and execution strategy. Charles?

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Charles Beck, Digimarc Corporation - Executive VP, CFO & Treasurer [3]

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Thanks, Bruce. Good afternoon, everyone. Q3 revenue increased 19% to $5.8 million from $4.9 million in the third quarter of last year. The increase was largely due to higher subscription revenue, which increased 48%, reflecting the impact of increased Discover and Barcode bookings over the past 4 quarters. Service revenue was up $200,000 during the quarter, reflecting the timing of program work with the central banks. License revenue was essentially flat.

Discover and Barcode bookings during the third quarter were roughly 95% higher than Q3 last year, coming in at $1.1 million. We expect to continue to experience lumpiness in quarterly bookings due to natural variations in timing and provisions of contracts during early market development and expansion into adjacencies.

Gross margin for the quarter was 67%, up from 61% last year, primarily reflecting the impact of higher subscription revenue.

Operating expenses increased by 3% from Q3 last year, primarily reflecting the impact of routine annual compensation adjustments for our employees. We have kept headcount relatively flat over the last 2 years. We plan to make 15 to 20 new hires in the next 6 months to address growing demand and delivery requirements.

Net loss for Q3 was $7.8 million or $0.65 per diluted share versus a net loss of $8.3 million or $0.73 cents per diluted share in the third quarter last year, reflecting higher revenues, partially offset by higher expenses.

We ended the quarter with $42.8 million in cash and investments. We did not raise any capital under our ATM program during the third quarter. There is $9.7 million remaining on the $30 million authorized under the ATM program. We will exercise customary care in determining the best course of action regarding the remainder of the authorization should a change in relevant circumstances warrant resumption of sales under the program.

We invested $7.1 million of working capital during Q3, which was at the lower end of the range of $7 million to $8 million we provided on our last call. During the quarter, we used $5.8 million of cash to fund operations and $500,000 for capital expenditures. We anticipate cash usage will be between $6 million to $7 million in the fourth quarter. Cash usage is expected to be lower than Q3, largely due to timing of vendor payments and customer receipts, which is consistent with our history.

We have some preliminary views of planning assumptions for 2020 to share. We expect service revenue to be modestly higher and to vary quarter-to-quarter based on timing of when services are performed, with a higher proportion of the work to occur in the first half of the year. We expect license revenue to be flat. Guardian revenue may trend down modestly as we continue to focus on maximizing contribution margin from this area of the business.

Discover and Barcode bookings are expected to grow significantly in 2020 from both direct sales and channel sales. Although we expect growth to continue, a wide range of potential outcomes is possible for this area of the business. We think the most likely outcome is continuing acceleration in bookings, consistent with our momentum theory of market development. When and how much bookings will accelerate due to tipping points in the market remains hard to predict. The range of potential outcomes is largely a function of the nature and timing of key account developments and the effect of adoption by market leaders on the rest of the industry.

Given our assumptions about revenue composition, we expect margins will continue to expand, reflecting a higher concentration of Discover and Barcode revenue. We expect operating expenses to be up high single digits to low double digits, reflecting the 15 to 20 new headcount positions I previously mentioned plus routine cost-of-living adjustments for our existing employees.

For further discussion of our financial results and risks and prospects for our business, please see our Form 10-Q that we expect to file shortly.

Bruce will now provide his comments on significant business developments, market conditions and execution of strategy.

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [4]

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Thanks, Charles. Before I dig into my remarks this quarter, I'd recommend, everyone, that you get a copy of the script from our website in the Investor section. There are a lot of footnotes that are, I think, interesting and helpful context.

So with that said, our application developer community is blossoming. It's important to keep in mind that we're a platform provider. I will give you a flavor of the expanding uses of the platform today. Our strategy has been and continues to be enabling a large community of developers to invest their capital to build applications on our platform. This strategy is intended to provide us with tremendous financial and operational leverage as we scale. We had a very busy quarter with lots of progress in many application areas and in advancement with key customers and suppliers. There's a great deal of innovation happening at the application layer. We are working hard to support our developers. The theme of today's report is emergence of the platform.

We made substantial progress during the quarter in delivery under our multiyear contract with Walmart to enhance fresh product labels and private brand packaging and provide enabling infrastructure to enjoy the benefits of our platform based on enhancement of these media. Details of the on-ramp to production for fresh product labels must remain confidential for the time being.

The private brand program anticipates enhancement of all private label brands. It began with food and consumables categories, with plans to extend into general merchandise. Walmart's packaging suppliers are adding hundreds of enhanced items into Walmart's supply chain monthly. We expect a large number of enhanced packages on the Walmart shelves by the end of the year. Products from global brand suppliers are beginning to arrive in stores as well.

All these initiatives converge on improving store operations and the customer experience. A recent Kantar study indicated that the keys to success are making it simple to shop and more cost effective. Walmart stands to gain in both of these dimensions of performance with our platform, fostering its continuing improvement of the customer experience.

Along these lines, Walmart recently announced they are launching a scannable toy catalog this holiday season. This is the first time customers will be able to interact with Walmart's toy catalog by using their smartphones to shop products directly from the pages. As Digimarc continues to grow our partnership with Walmart, we will find more innovative ways to help improve the shopping experience for their customers. We envision many more opportunities for collaboration. In support of this and other engagement opportunities, Walmart has updated their mobile scanning, using Digimarc Mobile SDK into their flagship app for both iOS and Android.

We have another important catalog customer rolling out with our platform. NewPoint Media is the parent of some of the most recognizable real estate publications across the U.S. and Canada, including Homes & Land magazine. All the home images in the magazine are enabled for easy identification by the Homes & Land mobile application, giving readers easy and immediate access to additional information about homes of interest and agents representing the properties.

Success in these endeavors could open the door to bringing digital experiences to the free-standing insert market. U.S. production of these inserts in the mail and Sunday papers is nearly 200 billion pages per year, containing over $500 billion of notional value in coupons.

We are also making excellent progress in enhancing the private brand portfolio of a leading European retailer. As with Walmart, we are discussing other uses of our platform to improve operations and customer experience.

More generally with respect to packaging, a rapidly increasing share of package enhancement is being done by suppliers. As this transition matures, it gives more time to internal experts for research and development and training. We have conducted more than 50 trainings so far this year. Research activities have included advances in marker-coder, dry offset, metal decoration, plastic molds, vending machines and fabrics.

There's a flurry of activity in recycling. Holy Grail won 2 sustainability awards at the FachPack conference in September, including overall winner. Organization of Holy Grail 2.0 is underway. The initiative is making excellent progress, with leadership reporting that more than 60 industry stakeholders will be participating, including 20 brands and more than 10 retailers. There is a video showing a presentation by the leader of the original Holy Grail project available on the web, providing a detailed update on progress of his work.

Digimarc-enhanced product was shown in more than 10 exhibits at the recent K Show, the leading trade show for the plastics industry, with over 200,000 visitors from 165 countries. The Holy Grail project leaders from P&G, TOMRA and Suez gave their perspectives on how they believe digital watermarking can revolutionize recycling in a video interview at the show. The segment runs for 20 minutes and is available through a link provided in the script.

TOMRA hosted an open house during the show on October 22 that drew 140 attendees. Executives from TOMRA, P&G, Verstraete and Digimarc welcomed guests and made presentations, followed by demonstrations of sorting using Digimarc-enhanced labels and substrates, showing sorting according to many important parameters like food versus nonfood. The demonstrations went very well, generating many questions about the path to commercialization. Increasing momentum is also evidenced by the growing participation of HGO leadership. You can track these events on our website.

We are having many interesting conversations with stakeholders about management structures that would best serve industry and facilitate rapid progress in mitigating the plastics crisis. I don't have a clear direction for you yet, but we continue to prefer a long-term business model in which an administrator oversees development of global standards, regulatory frameworks and license administration. In this model, we would supply access to our platform and development, testing, compliance and consulting services, much as we have been doing for the last 20 years to deter banknote counterfeits.

Leading consumer brands are announcing ambitious programs to improve the circular economy. P&G's sustainability initiative is known as Ambition 2030. Key goals include making all package recyclable or reusable, keeping packaging from oceans, advancing recycling solutions for absorbent hygiene products and reducing the use of virgin petroleum plastic. PepsiCo recently announced their first Chief Sustainability Officer and issued its first-ever green bond yesterday, seeking to raise $1 billion to finance green initiatives laid out by the company's 2018 sustainability report. Many other consumer brands are creating similar initiatives. P&G's CEO leads the industry-wide Alliance to End Plastic Waste that has 30 member companies.

Senator Udall and Representative Lowenthal issued a press release yesterday updating their perspective on the government's role in tackling the plastic waste crisis and reaffirming their intention to introduce what they call landmark legislation prior to year-end that will turn up the heat on industry. An early draft circulated in July included a provision that industry can apply for grants to improve research in the development of sustainable and safe alternative products, litter reduction, waste minimization and advanced methods for recycling and reuse. There are many encouraging signs that are motivating us to increase resource allocation to this market opportunity. We are actively exploring sources of funding for market development.

In other developments, Microsoft recently added a retail area to their newly renovated tech center in Munich, Germany, featuring multiple demonstrations of the capabilities of our platform. The center provides a differentiated executive touchpoint that illustrates thought leadership and innovation across Microsoft's 8 priority industries through immersive experiences and storytelling. The engagements at the center are designed to spark inspired conversations, creative ideas and new opportunities for customers and partners to work with Microsoft as their trusted industry adviser and digital partner. The Digimarc area features Digimarc Barcode for easy checkout, consumer engagement, inventory management and a streamlined package journey.

We are supporting developers applying our platform to manufacturing quality control, supply chain management and food safety. In manufacturing, we published a case study in September describing the results of field trials of improved manufacturing quality control with P&G using Digimarc Barcode. This underscores the significant problem revealed in a Packaging World survey that found 80% of manufacturers will report a problem with mislabeling this year.

We are making progress on a supply chain initiative with a major produce supplier. There are many serious industry problems in food safety and logistics we believe our platform could mitigate: one-sixth of all Americans are victimized by food contamination; the American food industry has a $55 billion safety problem; 20% of seafood is mislabeled, presumably to trick consumers; 382 food recalls were required in 2018 alone in the U.S.

After years of contemplation and development, it looks like mobile driver licenses are making their debut. IDEMIA, supplier of most of the driver license issuance systems in America, has developed a mobile driver license that incorporates our software. Oklahoma is beta testing the program. We estimate the TAM for Digimarc for U.S. driver licenses to exceed $10 million annually.

In the audiovisual space, Akamai, provider of the most pervasive, highly distributed content delivery network, has added edge-based watermarking to its content distribution network from Nagra, Verimatrix and Irdeto, 3 leading providers of watermarking services. Nagra and Verimatrix are Digimarc licensees. Akamai's watermarking solution provides a robust content security solution addressing significant piracy risks in the media and entertainment industry. I note this announcement not so much for its immediate economic significance, but more as continuing evidence of the broadening relevance of our innovations. The long-term potential may be significant.

We are seeing innovation in other areas as well. The Adobe MAX conference is happening next week in Los Angeles. You may have noticed our Dress Up Your Design theme for the show, highlighted on our website home page. We and several of our partners will showcase applications of our platform for the increasingly technology-centric textile and materials design community. The applications will span multiple media types, including sports and fashion apparel connected designs supporting consumer and enterprise customers. According to the IDC, the smart clothing market is predicted to surpass $4 billion in revenues by 2024.

Please keep in mind that our model is for Digimarc to focus on increasing access to our platform for developers. Our Job #1 to continue to improve the means to develop software and business processes to put data into all forms of media and efficiently and reliably extract the data. This is an unprecedented innovation that we believe will transform the landscape for auto-identification into ubiquity, supporting applications benefiting many aspects of the global economy.

Environmental, social and governance factors are increasingly affecting investment decisions. ESG investing is estimated at $20 trillion under management. Higher ESG-rated companies are being viewed as likely to generate higher profitability than lower-rated firms in the long term. Our relevance to ESG investors is becoming more obvious, as our platform is used to reduce manufacturing defects and plastics and food waste. Northland Capital initiated coverage recently with a focus on these areas of our business. We are committed to sustainability in product offerings and corporate operations and ever more mindful of the likelihood that algorithmic investors like Blackrock and Vanguard may have scoring mechanisms keyed to these metrics. We are implementing strategies to improve our positioning on this factor with active and passive investors.

Awareness of Digimarc has risen to high levels. Interest is strong. We are working our way up the IT priorities with retailers. Many CPGs are now engaged across the range of relevant applications in manufacturing, retail store operations and recycling. The industry has still not gotten their arms around the Holy Grail -- their words, not mine; no, it's not the recycling one -- of consumer engagement. We are not the linchpin for that. The industry needs to deliver predictable, high-quality responses to scanning and the universal call to action.

The supply chain is becoming more receptive as we move to scale production with industry leaders. They should now begin to assume more responsibility for application development and maintenance and system integration. We are evolving our organization to better serve them, tracking our significant progress in execution of strategy and concomitant market development. Our mission is to improve and expand the basic functioning of the platform and the quality of our support for these suppliers.

This transition contemplated in our strategy is key to effective globalization. Our European customer is the seminal case study for such expansion, even though in one of the initial geographic focus areas. We are working with a supplier and retailer on a potential adoption in a remote geography. In another market, we got a nice shout-out from the Association of Vietnam Retailers. The beauty in our financial model is the operational and financial leverage of engaging and supporting these suppliers and other developers.

In terms of key takeaways, Q3 bookings were up 95% over last year. Revenues were up nearly 20% from same quarter a year ago. Subscription revenue was up 50%. The bottom line improved by 7%. Cash usage was at the lower end of the projected range. Our business with Walmart has already expanded beyond the contract announced in April.

The broad utility of our platform is becoming more obvious as applications are being introduced across a wide range of media. Some recent examples include a second demonstration of Digimarc-enhanced plastic materials sorting that occurred in October with more product samples -- 42 from 10 suppliers -- before a larger audience of 140 people; 2 high-volume print publications adopted our platform to facilitate e-commerce; enhanced sports and fashion apparel will be showcased at Adobe MAX; Akamai has integrated 3 watermarking suppliers into their content distribution network security architecture; Oklahoma began issuing mobile driver licenses that use our platform for authentication.

Our end user focus is on earning the trust and respect of Walmart; facilitating enterprise-wide adoption of our platform; and, in the process, spinning up massive capabilities in their supply chain.

We have more openness to collaboration from suppliers than ever before. We had a successful demonstration of our sorting capabilities in October. Holy Grail won 2 major awards, and Holy Grail 2.0 formation is progressing very well.

We do our best to keep you all well informed. Not everything that is noteworthy is properly communicated via press releases. We recommend that you sign up for the Digimarc Digest newsletter, which features a monthly roundup of Digimarc news along with blog articles, videos, partner highlights and other industry topics. If you haven't signed up for the newsletter yet, the link in the script will allow you to do that.

You can also keep up with Digimarc on social media; again, a link is provided in the script. You can read the new October Newsletter from a link in the script. For recycling-specific news, we've created a separate section on our website where you can find the latest information about our progress in that market. We welcome your suggestions about how to continue to foster greater transparency and in-depth understanding of our progress.

That's it for our prepared remarks, and now we'll open the call to questions.

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Questions and Answers

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Operator [1]

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[Operator Instructions.] Our first question is from the line of Robin Knipp with Janney Montgomery.

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Robin Knipp, Janney Montgomery Scott LLC - VP of Wealth Management [2]

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Bruce, on the video from the K Show that you linked in the transcript, Gian DeBelder from Procter & Gamble talked about the fact that they planned on announcing the new leadership group for Holy Grail 2.0 some time around Christmastime, I think. How far behind -- after that will you guys be able to talk about a finalized pricing model and potential upfront payment from the group to get you guys more involved? Or might that happen around the same time? And I just have one follow-up after that.

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [3]

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We're exploring a lot of different possibilities for financing our involvement, and unfortunately, I can't give you a timetable nor a clear outcome from that. I can only tell you that we're very vigorously pursuing strategies for financing involving lots of different opportunities. It's not linked specifically to the formation of the group necessarily, although I should note that that could be a source of funding or a source of organization of funding sources. So we're very supportive of the Holy Grail 2.0 leadership and their development. But there are a lot of moving parts right now. There's really been a flurry of activity this year. It's been quite amazing, and so we're hoping that it all aggregates into a conservative action as promptly as possible, and then the leadership has given their estimation of when they think they can get that done.

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Robin Knipp, Janney Montgomery Scott LLC - VP of Wealth Management [4]

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Okay. Great. And just as a quick follow-up, on the same video, Gian DeBelder talks about launching an in-country trial, and it sounds like that would happen sometime in early Q4 2020. Assuming that we're using a 3-meter scanner that basically takes care of gating issues and works as well as the 1.5-meter scanner does now and the trial is, hopefully, pretty quick, does that mean you should be in a position to start signing recycling deals as early as early 2021?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [5]

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Well, first, as we say in our Safe Harbor at the front of the script and all of our filings, we don't vouch for what others say. So Gian and the others have their plan and their prerogative, and they're free to say what they like. So I'm not going to really comment on his views. You and I see the same thing there.

With respect to commercialization, the primary goals of Holy Grail 2.0 include figuring out the path to commercialization. And I've outlined a couple of times the things that we think are involved in that. And so we're trying to up our resource allocation so that we won't be on the critical path, so we're ready to go as fast as the industry wants to go. And there's, again, this enormous hue and cry and everyone announcing programs and people raising money and the federal government saying they'll have some money available. So there's money out there; we've just got to go find it, and we are determined to do so.

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Operator [6]

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[Operator Instructions.] And you do have a question from the line of Jeff Van Rhee with Craig-Hallum.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [7]

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Bruce, a couple from me. A lot of opportunities, a lot of directions. The platform obviously has -- I don't know if I'd say infinite, but almost infinite potential use cases. If you boil it down in the pipeline, can you just talk to me about the funnel and how you see your revenue funnel and what are the top items in that funnel? I think a prior question from Robin was just talking about recycling, but you talk about a lot of -- you've got a lot of things in there. What does the funnel look like at this point?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [8]

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Yes, so our focus, Jeff, remains on the primary investment thesis of retail and CPG and packaging and thermal labels. And there, we don't have a good surrogate that we might have in another market. So for instance, in driver license, IDEMIA is the right supplier and primary supplier in that marketplace. And Adobe MAX will be showcasing a provider of embellishments for sports merchandise, who is an excellent supplier in that marketplace and will be taking the lead.

In the retail space because of the success we've had in garnering opportunity at Walmart, we will continue substantial investment there. And so the pipeline, the funnel that we invest in heavily, we'll focus there.

The point of the developments that are percolating everywhere here is that we are providing a platform. Think of it like an operating system, and it's meant to facilitate the development of lots of applications. We don't need to be involved in all of them, and we don't want to be involved in all of them. We want to facilitate APIs that will allow people to do those things.

And so when we're looking forward at the upside opportunities of revenues and the funnel, we will be having those kinds of things emerging as upside. You might think of them as surprises; we wouldn't. But they're difficult to project because we are not directly involved in the customer relationships. We're just there to receive income and occasionally provide support. So no change in the basic focus, end user focus, of our work right now. And again, over time we would like to be able to receive it in the background.

So I mentioned in my remarks that for the first time in my substantial margin, the suppliers are doing more enhanced lift than us, and that is the strategy. But as that continues to evolve, we should see acceleration in production and a nice upside in our revenues, but we will not be on the front line in those engagements as we are today with some of the existing retailers. So I hope that's helpful in response of.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [9]

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You see, the previous quarter, I think you commented that you were engaged with 12 retailers, I think, on thermal at that point in time. How has that changed since your last set of comments?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [10]

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I don't recall the specific number from the last call, but we're trying to not get as much engaged in pilots. We have many of them. I think we have about 25 total pilots; not all of them are thermal. But we're focused instead, given that we've had enough pilots, in my view, and certainly we're not interested in doing proof of concept anymore. We're trying to expedite movement to production in order to facilitate a more rapid increase in our revenues and in order to bring the benefits to the customer quicker.

So as everybody becomes more capable, as the suppliers become more capable, the time line to volume should shorten, and so I would suggest that you not focus too much on pilots, but more on customer acquisition. And we'll try to do a better job of getting customers to confess to doing business with us earlier, if we can.

But in the case of our European retailer, who is well into production, they skipped the pilot phase altogether. And so I view that as a necessary gate that we go through in market development, but we're at a stage now where we're recommending wherever we can those either be a step on the way to production where they're doing a limited rollout, so think of it more like a limited rollout. Pilot implies they're trying it because they don't know if they like it or not. We're, hopefully, past that with our value arguments to retailers.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [11]

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Okay. And then with respect to the heads, I think you said 15 to 20 heads. What are you adding? Where are they going to be within the business?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [12]

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A lot of them are in the development and delivery systems. So as the use of the platform expands, it's important for us to provide very high quality service to what we call the developer community, which are the suppliers, typically, more than the end users. And the suppliers are, in the enhancement of media and the detection of Digimarc Barcode, those are the 2 classes of suppliers, if you like. And so we expect that to grow significantly during 2020, and so most of the headcount changes are intended to support that development in the business.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [13]

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And I guess just lastly, sort of to the higher-level theme, if you will, in the script I think you wanted -- you had the tag line; I don't see it here exactly -- but essentially, the emergence of the platform. Why now? Why that theme and why now?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [14]

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Well, you and I have talked about that, and I've talked about that with many of our shareholders, that when we started the commercialization of the platform, people thought we were in the checkout business or maybe the consumer engagement business. And I kept trying to tell everybody that we were trying to facilitate such things, that we were necessarily doing some of the priming of the pump or the early work in the direct connection to the customers, and that sort of counting packages wasn't necessarily going to be the right measure.

What we've seen this year, and particularly in Q3, is as I've referred to as the blossoming of the platform, that driver licenses, CDNs, apparel, all of these things are happening. We're not getting into those businesses. We're not in those businesses. They're using our platform. And that's why I offered the expression of the emergence of the platform. It's like, are you guys starting to get it now? Do you understand what I've been saying? This is -- really, the strategy is for us to build a platform of unprecedented value by being able to put structured data into all forms of media and take it out again. And that, then, is at the foundation of many modern concepts of growth of the IT industry, which I won't chronicle in answering the question here.

But that's what I hope everyone's starting to see, and that's what I thought was the most important sort of theme of the quarter as I organized my thoughts about the kinds of things to highlight for our shareholders.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [15]

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Got it. And then I guess just one last comment. I think you touched on the ATM you'll revisit under certain circumstances when it does and doesn't make sense to use it. And then, obviously, prior quarter you had a little more emphasis on strategic and potentially strategic funding. Just any updated thoughts from a capital markets standpoint about balancing ATM and other sources of capital, tighter tie-ups, potential things that you're working on, maybe even just a sense of if you've shifted one direction or another since last conversations?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [16]

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In our last call, we said that we had put it on hold for a while, and it wasn't merely pursuing strategic financing, but it was a bunch of circumstances that I didn't detail. And so the ATM's a wonderful vehicle. It is available, and we've used it quite effectively. And so we'll continue to evaluate circumstances and use it when we think it's in the best interests of the shareholders.

Obviously, there's plenty of opportunity for investment in the situation we find ourselves in now. And so we're, in terms of the general financing picture, pursuing financing specifically in the recycling area because we think that we could do much more work there to facilitate more rapid progress. And then in general, our balance sheet's in good shape and our cash usage in this past quarter was modest in relation to the range that we proposed. And so the ATM is just one of those opportunities for creating more working capital.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [17]

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Okay. Last one for me. Last quarter you called out that you had added 2 new customers within the bookings number, but you weren't at liberty talk about it, but you would probably be able to talk about it before year-end. Any ability to circle back and give a little more framework around who those 2 customers were or broadly what the use cases were?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [18]

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I think without getting too specific, they're encompassed within the long list of developments in the quarter here. So the contracts are in the general application areas outlined in the script.

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Operator [19]

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[Operator Instructions.] Your next question is from the line of Jeff Bernstein with Cowen.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [20]

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I had a few questions in no particular order. There was an article in the Journal about the impact on the shopping experience of pickers doing -- picking for curbside pickup and home delivery in stores. They talked about Whole Foods, but actually, they also mentioned Wegmans as being impacted by having sort of pickers filling up the aisles. Is Digimarc Barcode having an impact on improving the ability of these folks to do their jobs, or what's going on at Wegmans right now?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [21]

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Well, I don't want to talk specifically about Wegmans' pickers, but I can say that generally, Digimarc Barcode for packaging facilitates identification for everybody, including store associates, customers and robots, and that all of the major retailers everywhere in the world are seeking to improve simultaneously the shopping experience and the store operations efficiency. And so in order to improve store operations efficiency and customer convenience, they've got store associates doing things they didn't use to do before in the aisles, and some of the larger retailers have robots wandering around. Well, all of that can contradict the ambition of having a great customer experience if they get in the way of customers.

So the mitigation of the tension is efficiency. Getting more efficient makes all of that stuff the most tolerable it can be because the store associates can move faster, the robots can be more effective and the consumers can actually do direct assessment of products and then even purchasing more effectively. So we think we're a really important element of the mix of what appears to be the future of physical retail that you just described.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [22]

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Okay. That's great. Can you talk about Japan and what's going on there in terms of the group of retailers who, I guess, are value end packaging companies that are evaluating technology?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [23]

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Yes, I didn't put Japan in the script this time because I had so much other stuff to go through, and yet we're actually making more progress in Japan than I thought we could with our very limited resources. So we have a number of programs ongoing there, and we still have great support from the group over there. But as I complained in the last couple of quarterly calls here, I'm feeling a serious resource constraint with respect to serving them better that frustrates me.

So there's some R&D going on over there. There are some limited deployments with some retailers. There's some innovation going on akin to the notions embodied in the theme of this quarter outside of those areas. And so I'm still trying to find the means to better serve our customers and supplier partners over there. But we are making progress.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [24]

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Okay. Great. And then you mentioned with regard to the Adobe MAX show, apparel-connected designs. And I'm wondering if is the aim there for essentially personalized apparel? You take a picture of someone and it sends you their Facebook page, or is it about recycling of textiles or both?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [25]

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Both. Both and more. So there will be 2 exhibits there, both involving suppliers. And one will be sports jerseys and the other will be fashion address. And the applications range from consumer engagement -- that is, the ability to authenticate a particular -- all of this involves serialization at some level in terms of the fashion piece of it.

With respect to the jerseys, it would be able to engage the consumers, all of the consumers, the fans, through the jerseys themselves to whatever benefits the teams and the players want to deliver to them. So this just becomes a beacon, if you like, a marketing beacon for the fans to engage in real time with their favorite teams and players.

In the fashion side of things, our focus is on the supply chain. But the supply chain goes all the way through the emerging trend of resale of fashion and authentication. And so as people are now looking for ways to garner more value in the fashion supply chain, authentication is important so that someone seeing a particular fashion item could get exactly that item if they wanted to. Someone seeking to buy through resale a legitimate item can have comfort that it's authentic and not counterfeit. All of the materials can be linked back to their source in the growing concern about where things come from. And then if you need to do a repair of some kind, a fix, again, you might have the trail back through the supply chain to the appropriate resources.

So it's addressing what appears to be a growing trend toward infusing technology into fashion, but the range of applications is anticipated to be quite, quite broad. So we're going to show some things there -- some ideas, if you like -- but it's an emerging marketplace. We're demonstrating there, again, for the application developer community, "Hey, if you want to have structured data in all kinds of fabric, all kinds of apparel and other fabric products, we can deliver. So get in touch. We'll be happy to license our platform to you."

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [26]

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Got you. And lastly, you had a press release out with Berry Plastics, talking about the Holy Grail efforts. But is there anything more that you can say about how you're working with them and how they're working with customers?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [27]

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I don't think so. Berry's a marvelous company, very much world-class plastic supplier, and so they're quite concerned, as everyone is, about the circular economy. But they're also a great partner in other areas, so they're working with us in packaging more generally, as there are many things we think we can do with them. So as those things emerge, they're most likely to emerge from them. And that's again for investors and analysts who appreciate that.

I expect more news to come from third parties, if you like, what I call end users or customers and suppliers, than from us. And it doesn't really make sense for us to reamplify through a press release. And that's why signing up for all of our content -- we'll be happy to put everyone in the mailing list -- you'll get a much better continuity and understanding of the business by those sources than you will by waiting for us to put out a press release on that score.

So Berry's has already, as you have seen, taken the lead on talking about what they're doing. We would expect them to continue to do that, and so they'll provide news on us, but we won't be, again, necessarily putting out a press release to talk about it.

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Operator [28]

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Your next question comes from Robin Knipp with Janney Montgomery.

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Robin Knipp, Janney Montgomery Scott LLC - VP of Wealth Management [29]

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Just wanted to know if there was any update you could give us on the progress of your strategic that we've been talking about for a couple of quarters.

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [30]

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No, it's still not something that I can find the means, comfortable means, to talk about. We have engaged with lots of companies in discussions so far, but trying to characterize them is not appropriate in so many ways, including affecting negotiations and so forth. So we -- I continue to think it's a very good idea for us at this stage of development. And my thesis is that we don't want to have to build what others have, but they have to be wanting to deploy it for our benefit on reasonable terms for it all to make sense.

And I'm putting an investment requirement on that because we have a very large and growing number of companies that we're doing business with, and I want to have some special relationships with those who have resources that I want deployed on our behalf. So the notion of investment is to provide working capital for us, but most importantly, to get them to have skin in the game.

And you know also, I think, that I don't want a single investor. I'm trying to coordinate multiple investors, which makes it much more complicated than trying to find one. So that's about all I think I can do in terms of update as of this date for you.

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Robin Knipp, Janney Montgomery Scott LLC - VP of Wealth Management [31]

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That's fair. And just as a follow-up, what role do you see GS1 as having as Digimarc grows in its end markets and various applications?

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [32]

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We maintain excellent relationships with the 2 largest GS1 member organizations, U.S. and Germany. And they -- we adhere to their standards whenever they're available. One of the emerging opportunities for collaboration is in plastics recycling, where the standards are not yet established. And so we're having lots of conversations, and productive ones, with them about, okay, what kind of information do we put into the payloads in the circular economy? So they're great partners for that.

They, by their nature, don't drive business per se. They're not a marketing organization. They, however, are a very trusted supplier of integrity for data structures. So they're a key to the effective deployment of our data carrier in these new markets, in my view. I don't want us trying to figure out what they're experts in, and I'm very happy to have them on the team so that they know what we're trying to do, what people are expecting us to do, and they're offering both advice and initiatives where appropriate to get those things squared away.

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Operator [33]

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At this time this concludes our question-and-answer session. I would now like to turn the call back over to Bruce Davis. Sir, please proceed.

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Bruce L. Davis, Digimarc Corporation - President, CEO & Chairman [34]

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All right, great. Thanks very much, everyone, for participating today. We appreciate your continuing support. Look forward to talking to you again. I guess the next opportunity for us will be when we present at the Needham conference, and I'm presuming that will be webcast, hopefully. And then we'll have our next earnings call in February. So thanks very much. Bye, all.

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Operator [35]

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This concludes today's call. Thank you, ladies and gentlemen, for joining us for our presentation. You may now disconnect.