Bruce Davis - Chairman and CEO Mike McConnell - CFO

Kevin Hanrahan - KMH Capital Advisors Andrew Wiener - Samjo Capital Paul Sonz - Sonz Partners Kevin Hanrahan - KMH Capital Advisors Matthew Galinko - Sidoti

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

Thank you. Good afternoon. Welcome to our conference call. Mike McConnell, our CFO, is with me. On the call today, we'll review and discuss Q1 2012 financial results, talk about significant business developments and market conditions and provide an update on our strategy and operations. The webcast will be archived in the Investor Relations section of our website. Please note that during the course of this call, we'll be making certain forward-looking statements, including those regarding revenue recognition matters, results of operations, investments, initiatives, dividends and growth strategies. These statements 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 any assumptions, projections or other forward-looking statements to reflect events or circumstances that may arise after the date of this 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 our latest Form 10-K. Mike will begin by commenting on our financial results. I will then discuss our execution strategy and outlook. Mike?

Thanks, Bruce, and good afternoon, everyone. Overall, Q1 2012 revenues increased by 88% to $17 million from $9.1 million in 2011, and net income improved more than fivefold to $5 million or $0.70 per diluted share compared to $900,000 or $0.12 per diluted share in 2011, both benefiting from the legal settlement with Verance and from gain in their quarterly revenues back on track. The balance sheet remains in excellent shape with more than $44 million in cash and securities and no outstanding debt. Also of note, late in the first quarter, Nielsen and Digimarc decided to reduce their investments in their joint ventures to a minimum level, while assessing alternative approaches to achieving each company's goals and the emerging market opportunity of synchronized second screen television. Bruce will discuss this a little bit more later on. In connection with the suspension of operations, the remaining first quarter operational expenses and the expenses associated with the suspension were accrued as of March 31, including severance cost for the joint venture employees. Our net contribution to the joint ventures for the first quarter operating expenses and the suspension cost were approximately $700,000. We continue to invest in other growth initiatives including Digimarc Discover and the second wave of retained patents. Spending in the quarter was impacted by extraordinary litigation expense associated with the Verance litigations that were settled favorably in January of 2012, resulting in extension of our license with them and payment by them of $8.9 million of royalties for current and prior periods. Q1 financial highlights include the 88% revenue growth primarily due to the Verance settlement obligation where we received $8 million of prior year royalties through September 30, 2011, and about $900,000 for the fourth quarter of 2011. Higher service revenues from the Central Banks and from Intellectual Ventures were offset by reduced development services for the Nielsen joint ventures. Gross margin was 89%, 7 points higher than the prior year, reflecting a greater mix of license revenues to the total. We experienced operating expenses at similar levels to Q1 of 2011, continuing to reflect investments in new product initiatives and approximately $500,000 of Verance litigation expenses. Operating income was $9.2 million or 54% of revenues. And income taxes were $3.1 million, 38% effective tax rate. Also note that our cash taxes on this book tax provision will be only by $1 million, the difference being primarily attributable to stock compensation, tax benefits and research and engineering tax credits. Our financial performance thus far is within the range of our expectations at the start of the year. As is our general practice, we intend to update you each quarter regarding strategy execution, but not plan to provide financial guidance. For a further discussion of the financial results, our business and financial models and risks and prospects of our business, please refer to the Form 10-Q that actually we'll be filing today. Bruce will now provide his comments on our outlook and execution strategy.

Thanks, Mike. There were several noteworthy events in Q1. The most obviously was the settlement of litigation with Verance, resulting in a payment of royalties and a three-year extension of our license with them. The settlement paved the way for an extraordinarily profitable quarter, a lower rate of G&A spending going forward and a continuing income stream from this important licensee. In other licensing news, we received our first full year report from Intellectual Ventures. Although the details of the report are confidential, I can say that license revenues attributable to our portfolio were substantial, but not sufficient to cover the $36 million of minimum guarantee and other IV costs associated with development and monetization of our portfolio. Given that this is our first full year report, we've spent considerable time with Intellectual Ventures, developing and understanding of how the allocation of revenues and costs works. We are continuing those discussions. We're not yet in the position to assess the likelihood or magnitude of profit participation once the guarantees have been fully paid over the five quarters remaining in the guarantee. That will be a function of the rate and scope of adoption of our patented inventions, the general performance of IV in licensing its portfolio and the associated costs attributable to our assets. We, at Digimarc, are doing all we can to foster adoption of our inventions and assist IV in development and monetization of patent assets that we licensed to them. In another significant development during the quarter, we and Nielsen decided to reduce our investment in our joint ventures to a nominal level for the foreseeable future. As we assess how to best achieve our goals in the emerging market opportunity of synchronized second screen television. The Media-Sync joint venture has been working on a software and service platform to facilitate such experiences for the past couple of years. The market opportunity has inspired a great deal of investment across a wide range of companies, lead it to a crowded and competitive environment. This in turn has upped the table stakes for competing as an operating entity in this space. As I have said many times, we have two ways to participate in this growth opportunity, an investment increasing of an operating business via joint venture and the licensing of our IP. Based on the current assessment of the market and competition, we have concluded that licensing is the better path to maximum profit. Our view of the likelihood that television will undergo the changes that we contemplated when forming the venture has been strengthened by our experience and observations. Digimarc Discover market development continues the pace. We've been making inroads in the publishing and have had some experimentation going on, on other application areas. Sports Illustrated use of our Digital Watermarking in a swimsuit edition was our highest profile use thus far. Our technology performed flawlessly. The visibility created by the SI issue has enlivened considerable interest in the publishing industry and we're working on many leads. All these developments taken together with a foundation for a year of significant growth in revenues, profits and cash flow, anticipating excellent financial performance in 2012 and a bright future in our target markets, we've authorized our first cash dividend. We feel that the dividend is an appropriate addition to our capital allocation strategy, providing income to our current shareholders and hopefully a means to broaden the appeal of our company among potential investors. In closing, I'd note that we are anticipating excellent financial performance in 2012. We do not anticipate increasing our operating budget in order to accomplish this, but then these constraints we are devoting a greater share of our budget to R&D and IP development to foster long-term sustainability and growth. We intend these investments to lead a substantial growth in licensable technology and patent assets in the coming years, addressing numerous exciting advancements in the media identification management and enhancement. That's it for our prepared remarks. Now we'll open the call to questions.

(Operator Instructions) You have a question from the line of Kevin Hanrahan of KMH Capital Advisors. Kevin Hanrahan - KMH Capital Advisors: Congratulations on your initial dividend. I had a few questions. If I ask anything more about IV, are you going to tell me?

No. Kevin Hanrahan - KMH Capital Advisors: I had a question for Mike. Mike, it looks from looking at the cash flow statement that I can see right now that you've bought back some shares in Q1. Can you tell me how many shares you bought back?

I do have that. The shares in the open market were less than 10,000 shares, as I recall. And then we have our ongoing stock for taxes trade with employees. That was the difference. Kevin Hanrahan - KMH Capital Advisors: So I'm just guessing there was maybe like 15,000 or 18,000 shares for the employees?

Yes, I think that's close to it. I don't have that right at my fingertips here. Kevin Hanrahan - KMH Capital Advisors: Do you have a breakdown of how much you spent for the open market purchases in dollars?

A couple of hundred thousand dollars.

Your next question comes from the line of Andrew Wiener of Samjo Capital. Andrew Wiener - Samjo Capital: Mike, you take out the $500,000 of Verance and it's about $1.5 million of non-cash operating expenses. So is the quarterly cash rate about $4 million?

That's a reasonable assessment. Andrew Wiener - Samjo Capital: The comments on the call were expectation of spending to remain relatively stable at that level?

Yes, I think we gave some indication last call that expenses would lower beginning second quarter and we don't have any litigation and then that was pretty significant quarter there. Andrew Wiener - Samjo Capital: Bruce, when you talk about licensing versus an operating business as far as monetization the TV-Sync or whatever you want to call that opportunity, is that going to be exclusively through the IV relationship or was there sort of incremental, either product development or IP developed within the JV. And if there was and if you believe that has a marketable value, is that something that the JV itself will market or will Digimarc take responsibility or will that go to Nielsen?

We believe that clearly the patent assets license to IV will be relative in this space. We also have numerous assets in the second wave that are in the process of maturing into issued patent. There are about 20 issued patents now in the second wave and about 250 pending. And so we anticipate that that group of assets matures and there may be some additional inventions that are implicated by the company that are seeking to be large in this space. The joint venture was focused on software and services and now that IP developments, I don't anticipate that there'll be patent rights belonging to the joint ventures that will be licensed. Andrew Wiener - Samjo Capital: And when you said in material, you're reducing how much? I don't if I missed it. But, Mike, could you give a quarterly run rate for the expense around the JV or whether your look of basically this year?

It's going to be nominal. It won't be material, Andrew. Andrew Wiener - Samjo Capital: Next question I had was, I believe in the recent past you discussed that the company was seeking to secure a long-term extension or renewal of the Central Bank contract. I was wondering where that stood and to the extent that you've been able to secure that. How and when it would start to change the economics we see in the operating segment?

It's not yet signed, but the process is going along very well. And we hope that will begin to see some beneficial financial effects beginning next year. Andrew Wiener - Samjo Capital: And then the last, I shall now get back into the queue. Has there been any change or progress related to some of the defense opportunities that we've talked about in the past?

As we have talked about in the past, it's hard to tell. Yes, we're working on several and the prospective customers continue to engage with us, but they are not in terms of money. So I don't know. It's about where it was before. There are a lots of expression of interest we have, a large funnel, and we have no revenues to speak of. So it still there as an upside opportunity during the year. But we're now four months in and they haven't been able to deliver anything to you guys. Andrew Wiener - Samjo Capital: And listening to that, is there a possible belief on our behalf that our technology is being used and we're just not being paid or is it that we believe the projects haven't moved forward and received fund yet?

Well with respect to work done in classified areas or areas that are of high national security interest, it's hard to tell, who's doing what obviously. So it's not so much that we fear about our technology is being used by others, although that certainly could be true and we don't know it. We don't have any evidence of that. And one of my frustration is that we think we have obvious relevance. We think that prospective clients within that community understand that. But I'll be damned if we can get the money freed up to get work on. That's the problem. So it's sort of an obvious max there. But the processes are opaque and they're dominated by large suppliers and we're not a large supplier. So we kind of model our way through the ambiguity of trying to get some money freed up to provide some valuable services and technology to the appropriate customers. And we still think it may happen, but we really have no means to handicap to very reliably.

(Operator Instructions) You have a question from Paul Sonz of Sonz Partners. Paul Sonz - Sonz Partners: The question I had is, Bruce, you went through in your comments a description of the discussion you're having with IV now. And I wondered if you could go over that again, exactly what you're talking to them about?

We're making sure that we understand the report in a way in which revenues and the expenses were allocated, because it's our first full year report. We had a report previously that covered just a couple of months and we didn't view that as particularly instructive. So we've been talking to the folks there about all of the elements of the report that we did receive and there are ongoing discussions there. Paul Sonz - Sonz Partners: And this may seem odd to me that I don't understand why this will be something new to be discuss, when this all have been sort of laid out in advance. I mean what one would expect in how this thing would happen?

The structure for the relationship is contractually determined and documented, but accounting involves lot of judgments. And so we're kind of mustering all the judgments to make sure that we agree.

(Operator Instructions) Your next question comes from the line of Kevin Hanrahan of KMH Capital Advisors. Kevin Hanrahan - KMH Capital Advisors: Bruce, I had a follow-up question, so basically you had this report and got that I think in Mid-March, right?

Yes. Kevin Hanrahan - KMH Capital Advisors: And that the confidentiality reports like none of that will be in the 10-K, right?

Right. Kevin Hanrahan - KMH Capital Advisors: So you will get another report around the year from now in Mid-March as well, right?

That's right. Kevin Hanrahan - KMH Capital Advisors: And then, we'll find that more about, how it's going?

Yes, that's the way it works. I wish there was more visibility but it is what it is. And we're collaborating with them on lots of opportunities and they have been successful in generating some significant revenues. And so we're hard with them. The profit participation, the existence under the scale of it will be significantly influenced by our effectiveness in getting adoption of our technology. So our discussions with them have to do just the methodologies that they are using for allocating revenues and in cost. And that's important to us that we understand what we're doing until comfortable with it. But the crux of making more money is really in adoption, and we're doing all we can to foster that. Kevin Hanrahan - KMH Capital Advisors: Can you tell us anything if you can divulge it about Shazam in particular?

As you know we sued them and then we refused it, so we could have some discussion, then we did the IV, so the relevant assets became domain of Intellectual Ventures to license. Intellectual Ventures is a very thorough company. And their license programs, we've been working on this, that's about all I can say at this point of time. But they are quite aware of the opportunity and they and we have worked on it. Kevin Hanrahan - KMH Capital Advisors: That's was my point, because it's always like you're suing Shazam and then you drew in, a friendly press release there, that says, you're trying to work things out. And then we never heard what happened but I understand those patent assets got partially turned over to IV to work on that.

That's what happened. And just to help everyone on the call, understand that Shazam opportunity a bit better. They are a private venture backed company. But under the U.K. Companies Act, they required appropriate filing with financial statements which they do. And so we get a chance to see how they're doing in terms of scale and in the most recent report which is full financial statements ending in June of 2011, they are running about $30 million of revenues. And I don't want to get a sort of crazy ideas about how much royalty income they could generate. They're not that bigger company, even though they have a big voice. They have yet generated a lot of revenue. Now we're get their next few quarter in a couple our months for the period ending in June, 12. But we'll see what that shows. In terms of growth, maybe they've grown a lot. But that is much as we know from the public we availed the information so far about their scale.

Your next question comes from Matthew Galinko of Sidoti. Matthew Galinko - Sidoti: Just curious if we get read into the winding down of the JV as you hired particular six staff in licensing the other second screen players to review IV?

I think what you'll read there, it's just as what I said and may be stated in a little bit different terms. Nielsen and Digimarc entered into the joint ventures because of certain interest that we have that we're well known to each other but different that we thought to be well served by the joint ventures structure. And as we build some demonstrations and deliver them through ABC and the Weather Channel and Oprah Network and so forth. This kind of tense interest in the category emerged and with the substantial deployment of capital in potentially alternative suppliers, including IntoNow, which was acquired by Yahoo! and Shazam who actually got $35 million dedicated to this opportunity and a cast of dozens of others. And so as time passed and we assessed the marketplace, we made individual judgments that happened to be very well aligned. That we thought we could satisfy our objectives without having to defeat that competition essentially, which would be the proposition we have to have in mind that we continued to invest significantly in highly competitive environments with greater capital in an operating business. I don't mind speaking our objectives. I don't want to speak for Nielsen, because they can speak for themselves. But for us, our objective was to make money, a pretty simple stuff. And so we believe now that somehow the market has developed that we can make the most money through licensing rather than parallel paths of licensing an operating company or an operating company alone. No. We would never have an operating company alone, because intellectual ventures has relevant IP. And so there would be a licensing opportunity, but the objective of the management of the joint venture would be to defeat the competition, to be the primary supplier. And we're not certainly any longer that that would be the best outcome. We wish all of the prospective suppliers, the best of luck, because they're all hugely successful. And what we've gained from the experience in the venture and from the observations of the market is that, we hope they're all right with putting all that capital in with, so many suppliers announcing their intentions, and with so many businesses redefining their businesses to participate. If all of that is true, then we're going to do great in licensing. So that's really a more elaborate explanation of the motivations for the change.

Your next question is a follow-up from Paul Sonz of Sonz Partners. Paul Sonz - Sonz Partners: Bruce, in the new IP that you're generating that is not dedicated to IV, is it too early to expect that there will be the licensing of that IP or interest in it?

Yes, to the first part, and no, to the second part. So with only 20 issued patents, it's a pretty small portfolio, and so we would generally not planning to grow in aggressively market with the 20 patents. But that doesn't mean that others might not be interested in the license discussion, because behind the 20 patents are another 250 applications, and a growing number of applications, and a continuing stream with innovation, some of which is relevant to the space. So, yes, we're not going to grow, we're not ready and it's not right enough for us to go out in an active licensing program. But that doesn't mean people won't come to us. Paul Sonz - Sonz Partners: And the second question is, I've noticed that the real pickup in the use of Digimarc Discover, I just saw Brides Magazine, which I think has an unusually large number of watermarked photos in the magazine. At what point do this become a real business?

As soon as we can make it back. Brides Magazine did a terrific job. We're very happy about the work that they did. Again, they are demonstrating to the industry, how to do it. House Beautiful remains a terrific role model for the industry. Obviously Sports Illustrated is the biggest brand in circulation that we've dealt with and happened to be their key property in swimsuit edition. So we're making good progress of getting better visibility. There is still experimentation with uses and development of engagement models and a bunch of work being done that we're trying to foster to the best of our ability within our means. And we also see a lot of great work from a group publisher in Australia called Pacific Magazines. And so we're making progress. And where these things tend to work is that there's a tipping point, which often times can't be identified in advance. It happens and then everything starts really moving. So we're heading in the right direction, but we haven't hit tipping point yet. So I don't know when that will come. If I see it, I'll let you know for sure. But we think we know what is missing in the demand equation and we're working out on software development to try to address that and on relationships, which are another part of the work. But some of it just has to do with adoption, and the creativity and commitment of publishers, brands, and agencies that we don't control. Paul Sonz - Sonz Partners: And I assume that I have not seen anything in newspapers. I am assuming that the newspapers are still not availing themselves of Digimarc Discover.

No, I wouldn't assume that. What I'd rather assume is narrower than that which is we're not investing significantly in newspapers. There is actually some work going on there that could yield good results. What I said in the prior call was that we were backing up on our investments because we were frustrated with the kind on despondent view of the newspaper managements in general. But there are some right people, and some guiding lights and some aspiring mangers in that business who know of our technology and may end up again teaching the industry some wisdom about how to foster survival through the use of the technology. We're just, we've backed up on the investment, because we didn't feel that we could influence it very much.

Your next question comes from Matthew Galinko of Sidoti. Matthew Galinko - Sidoti: I guess sort of the follow-up, can you say if there is an ongoing relationship there, if there is any potential for future use in that magazine?

Yes. To all the express and implied questions and the timing of publishing group, they are quite well aware of how the program went and what the results were which are in not our data to share. But I think everybody was quite happy with the results. And again, the industry is trying to figure out what the formula is for what is generically refer to by one of our business partners as action codes, for the notion of connecting from publications to network services, it's gaining in popularity and use. But it's still in what I would call experimental stage where the business models and the marketing models are not mature and often repeated. So that's what we're working on right now. We think our basic encoding and reading technologies are working superbly within, we've done that piece very well. And so our focus and the focus of the industry is on, okay, now we know we can do it, whatever we do with it. And that's where I prefer to tipping points is and then make them category by category or industry wide, but some publications are going to figure out the formula. And then, all the competition is going to emulate what they do. And I think we're well on our way in that direction. I'm optimistic about the outcome. I just don't know what the timing is.

At this time, there are no further questions. I will now turn this call back over to Mr. Davis for any closing remark.

All right, great. Thank you to everyone for participating and listening in on the call. So that concludes our call for this quarter. We look forward to talking to you again in another quarter or in between in our informal discussions. So thank you all for your support. I appreciate it.

Thank you. That's concludes today's conference. You may now disconnect.