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Executives

Bruce Davis - CEO

Mike McConnell - CFO

Analysts

Jeremy Grant - Stanford Group

Andy Hargreaves - Pacific Crest Securities

Kevin Henehan - KMH Capital Advisors

Jonathan Ruykhaver - ThinkEquity Partners

James Patrick - Kristen Capital Management

Digimarc Corp. (DMRC) Q4 2007 Earnings Call February 29, 2008 10:00 AM ET

Operator

Good afternoon. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Digimarc Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Bruce Davis, you may begin your conference.

Bruce Davis

Thank you. Good morning ladies and gentlemen. Welcome to our 2007 financial results conference call. Mike McConnell, our CFO, is on the call with me.

We issued a press release earlier today announcing our Q4 and full year 2007 financial results. The objectives of this call are to summarize and comment on these results, review significant business developments and market conditions and provide an update on execution of our strategy for 2008. This webcast will be archived in the Investor Relations section of our website.

Before we proceed, please note that during the course of this conference call we will be making forward-looking statements regarding management's opinions and expectations about Digimarc's business, its markets and financial performance that are based on a current understanding and expectations. These statements are subject to assumptions, risk, uncertainties and changes in circumstances. Actual results may vary materially from those expressed or implied by such statements. For more detailed information about risk factors that may cause actual results to differ from expectations, please see the company's filings with the SEC including our Form 10-Q with 10-K to be filed later today and our earnings release posted on our website.

During the course of this conference call, we will also refer certain non-GAAP financial measures as defined by the Securities and Exchange Commission Regulation D. Definitions of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in the earnings release for the quarter ended December 31, 2007. The earnings release can be found on the Home Page of our website.

Please keep in mind that any guidance we offer represents a point in time estimate. We expressly disclaim any obligation to revise or update any guidance or other forward-looking statements to reflect events or circumstances that may arise after the date of this call.

By way of introduction, we had a great finish to the year reflecting effective execution of this strategic plan outlined in previous calls. Key financial measures of gross margin, earnings per share, adjusted EBITDA and cash flow all significantly improved from a year ago on a similar level of revenues, evidencing our progress in building a world-class organization.

2007 culminated in a, momentous event with the announcement of a strategic licensing and services agreement with Nielsen company. This great new opportunity comes amidst many other signs of progress including more than $11 million of improvement in our bottom line a significantly better cash flow for the second year in a row with nearly $19 million of adjusted EBITDA or equal to 17% of revenues.

Revenue growth in 2007 was around 5%. We believe that this growth rate was lower than normal due to dampening effects of REAL ID ambiguities. These ambiguities were result of January of this year with publication of final regulations, appropriation of additional funding, and establishment of a grant program distributed to the states help them gain compliance.

Michael, will now provide additional comments on Q4 and the full financial year results and the financial outlook for 2008, then I will return to provide an update on progress with the execution of our 2008 annual operating strategy and plan. Mike.

Mike McConnell

Thanks, Bruce and good morning everyone. Our Q4 and 2007 financial results were generally inline with prior guidance and significantly better than last year. Q4 marked our second consecutive profitable quarter with revenues up 12% from the comparable period a year ago, as we finished the year on an upbeat note. We made tremendous progress in 2007. More specifically, 2007 revenues were $109.8 million, 5% higher than the prior year.

Gross margin for the year improved four points over the prior year to 38% and reflect significant financial leverage improvements in our operations. Overall, operating expenses for 2007 were $43.4 million down 11% from the prior year demonstrating continuing improvements in our productivity.

Net operating results for the year approached breakeven with the slight loss of $0.02 per share an $11 million improvement over the $0.57 loss per share in 2006. Adjusted EBITDA for the year more than triple to $18.9 million compare to $5.7 in 2006 and adjusted EBITDA as a percent of revenues improved 17% from 5% during the prior year.

Capital expenditures were $18 million compare to $10.5 million over prior year reflecting program investments, flowing from various contract awards during 2007 and prior years that will contribute to revenue growth in future periods. The cash flow from operations for 2007 was $16.3 million, a $7 million or 75% improvement from the prior year.

Our balance sheet remains very strong. We have $33 million in cash, investments and restricted cash about the same amount as we began the year. Working capital stands at more than $35 million with the current ratio of more than 3:1. We have no long-term debt, and our long-term liabilities are comprised primarily deferred revenue and some small amount of capital leases.

Our receivables grew about $4 million over prior year to about $18.5 million and reflect increased revenues particularly in Q4, where we achieved 12% year-over-year growth, and we had an increase in [billings] deferred revenue that will positively impact revenues in the coming quarters.

Our inventories, grew by about $700,000 over prior year, and reflect advanced purchases of consumables for our first quarter international sales, and our backlog was approximately $225 million. For further discussion of 2007 results, our business and financial models and risk and prospects for our business, please see our Form 10-K that we expect to file later today.

Now, I would like to say a few words about our financial expectations for 2008. Our views on 2008 remained pretty consistent with the guidance we gave you in December. We are gaining clarity on a number of factors. Regarding revenues, we continue to expect our media identification and management revenues to grow more than 30%. Our ID revenue growth rates remain a bit ambiguous.

Since December, there were a number of positive developments in the ID area, including publication of final regulations for REAL ID, appropriation of additional federal funding for driver license upgrade and publication of grant guidelines for [awardee] funds to the state. Grant applications must be filed in early March, and DHS says the awards will be made four to six weeks later.

Meanwhile, states are studying what's necessary for compliance, developing cost estimates and preparing to request funding from their legislatures to begin necessary upgrade. We expect parallel activities to call less during the second quarter to allow us to better estimate the amount of ID revenues that we recognize during 2008. Until, we gain this clarity, we suggest continuing to model mid single-digit growth in this area of our business.

Capital expenditures are likely to be a bit higher in 2007 levels at around $20 million. Actual spending may vary depending on possible delays in existing programs and the timing and type of orders received during the year. We are expecting continuing improvement in cash flow, with operating cash flow and adjusted EBITDA both grow into more than $20 million. We are also expecting to generate more $5 million of free cash flow meeting operating cash flow less capital expenditures, which compares to $2.5 million negative amount in 2007.

Take into the account, the effects of non-cash charges of amortization of intangibles, depreciation and stock compensation, EPS may range from a small loss to small profit, subject to the timing and mix of various aspects of revenue growth in relation to some investments in supporting higher revenues in future periods that we may choose to make.

Absent any unavoidable delays in program deliveries, our first quarter 2008 is on track to improve across the board compare to prior year, with increases in revenues, reduced losses, and improvements in our key cash flow metrics. We continue our efforts to better explain our financial model to investors. Following disclosure of the breakdown of revenues and growth rates for the major areas of our business in December, we are working on development full separate P&Ls of each area and hope to complete this work later in 2008.

Bruce will now offer some closing remarks.

Bruce Davis

Thank you, Mike. After years of investment and incredible hard work by our employees and teaching the market the verges of digital watermarking and then reshaping the [Polaroid] assets. We believe the inflection points we have been preparing for already enhanced. The two years of improvements in operational and financial performance behind us, REAL ID ready for implementation and the great promise of the Nielsen relationship now in development.

We are shifting our priorities and building the foundation for growth to the fostering of higher rates growth. As you know, our top business objective is to deliver sustained profitable growth, capitalizing our leadership and secure identity management systems and digital watermarking. We are ready to exploit the significant opportunities in our markets that we have identified to accelerate growth and continued expanding margins over the course of the next several years.

Our employees have done a remarkable job of transforming the company, as we anticipate these significant opportunities opening up in our target markets.

This concludes our prepared remarks. Thank you very much for your interest and support. And we will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will be from the line of Jeremy Grant of Stanford Group.

Jeremy Grant - Stanford Group

Hey, good morning guys. Congratulations on a strong quarter.

Bruce Davis

Hi, Jeremy.

Jeremy Grant - Stanford Group

I wanted to start off I guess by asking, now that the REAL ID regulations are finally out and I realize that, it's still taken a bit of time for states to digest them. What sort of trends are you seeing from your state customers, now that they are out there, are you starting to see more increased coming about what its going to actually take to do the upgrades or things are little slow in that area. What kind of color can give us there?

Bruce Davis

The response varies, but the general trend now is toward moving forward to getting the work done. And certainly it's reduced the ambiguity that was hindering the upgrades that would have been done. Otherwise the states forum embracing the law are moving forward with their budget estimates applying for federal ramps, at least eight of our states that have applied for federal grants already and requesting additional funding from their legislatures.

There was a significant development in Washington in the last few days. The National Governors Association has circulating some views and some documents that are available publicly. That they want to make sure that all of the $80 million that has been appropriated goes out to the states to support their upgrades and does not go into a hub and that it made the views clear to the congress and to DHS.

They have also stated the view that they would like the Federal Government to pay the full $4 billion and they would like to see a $1 billion in the '09 budget rather than about 150 that currently is there. And they've also requested a delay in the filing date for the grants; the current date is March 7, in order to give more states an opportunity to file their grant application.

So, I think they're really heating up. In that communication there was none of the prior (inaudible), we don't want this. This is a bad law of blah, blah, blah. Just give us the money, which is pretty exciting to us.

Jeremy Grant - Stanford Group

Sure. Given that progress is there, I know the guidance you gave back in December was essentially assuming, because the government has been so I guess slow on getting regulations and this things out of REAL ID, that you were not assuming any REAL ID boost in the 2008 guidance that you gave to those folks on the street.

Obviously, you've reiterated the outlook on this call, any take as to when you might have a little more visibility to be able to give revisions on that, hopefully in the upward direction?

Bruce Davis

Yes, yes. Our conservatism there is really the confluence of a number of factors, uncertainties primarily around when will the federal funding be released and so as we noted in the script here has been changing sort of day-by-day. The schedule has been early March applications four to six weeks later award, now that may or may not be delay the DHS is not responded to the request from NGA yet. And until did they were to stay on that schedule that would mean that, during second quarter we'd actually see, where that money was going to go and the kinds of things that was going to be spent for. And because of the rather complex revenue recognition rules that we operate under in the varying timeframe for delivering the kinds of things we deliver, at that point in time, I think we'd have greater clarity on the upside.

Until then it's hard for us to give a good foundation to the financial community, as to the implications for the remainder of '08 of the REAL ID and the second part of that is in parallel as the states are requesting money from the legislatures. Again, we don't know how long that will take, how much they will get, and then where it will be primarily directed in 2008.

So, we believe there is potential for significant upside we can't characterize it. This is our problem. So, we are suggesting as a conservative approach to the ambiguities here to model single-digit growth were comfortable with that and we are going to do our best to do better, but the upside opportunity is largely market driven rather than company driven it will happen when it happens. We're ready for it. We're aggressively pursuing it and we intend to get our fair share. We just don't know exactly when it will happen.

Jeremy Grant - Stanford Group

And as a follow-up on that, with the aggressive pursuit, how do your assumptions right now for what sales and marketing expenses are going to be for 2008, is that something we're going to see steep jump in, as you need to be reaching out and touching more of your existing say, customer base on this topic?

Bruce Davis

We expect some increase in investment in that area, I wouldn't call steep jump. But we're trying our best to be to continue to be very efficient, as you see for the last several years we've done remarkable job, in that regard. We'll keep working very hard to be as means as we can be to maximize the financial return, but there is a ton of work right now in the marketing and sales areas preparing for these upgrades and for the additional funding we expect to see.

Jeremy Grant - Stanford Group

Okay. And then one final question maybe probable I'll let some others jump in. A related project to REAL ID has been the enhanced driver's license project, which contains an RFID chip, and I know it's deployed in Washington state, perhaps we've seen so far and it's been -- that has been pretty successful more demand for then the state, probably as we initially see.

Sort of a two part question, one I know, several other states they've also signed, memorandums of agreements with DHS to do similar projects. What is timing on seeing another state or two come into that system? And then the second is, are you seeing anything from Washington alone that could lead to some perhaps upside I guess on revenues or margins this year?

Bruce Davis

With respect to the rollout in Washington State, I have to say everyone is delighted. It's an excellent product. We had a great cooperation in Homeland Security and the State of Washington. So, we were out on time with a very good product and since then they have responded well. They have a backlog of people trying to get EDL, and so we are very pleased on all levels with what is happening in Washington.

What impact that has on the overall business in '08, is not going to be sort of a game changer because of single state with single product, which is a subset of their current distribution. But given the way in which the systems are embracing, and we hope it will become a large percentage actually of the licenses that the people seek, if that becomes true on a larger basis than that would be a game changer in the marketplace it's a more sophisticated product that has a higher cost to it for the citizens, they are paying about $15 more to get it.

With respect to, when will others come on board, we hope really soon, and we are obviously actively engaged with everyone, who is interested in the product and we have an excellent reference account from on a very good performance in March, and it doesn't say that we are the only producer at this point in time of that product and they said that it's an excellent product.

So, we're very optimistic. We're going to get more business there, and we'll get that business soon. We believe and that will roll those systems out. The Washington State system took a little less than a year to install given it is the first one, we would expect some efficiencies and later installations, but this kind of goes to the '08 (inaudible) point here about it kind of depends on when we get the order and the resource available from the state, and how quickly we can begin the issuance. How much money we look will flow in '08 versus '09.

Jeremy Grant - Stanford Group

Okay, great. Thanks.

Bruce Davis

Okay.

Operator

Your next question will be from the line of Andy Hargreaves of Pacific Crest Securities.

Andy Hargreaves - Pacific Crest Securities

I'm just wanted to ask a question on the increasing assessment you refer to. Is that related specifically to REAL ID or watermarking or both?

Bruce Davis

The increase investment, which statement you're referring to?

Andy Hargreaves - Pacific Crest Securities

Yeah, Mike referred to the potential for increase investment in the back half of year that might raise OpEx?

Bruce Davis

I think that was me actually.

Andy Hargreaves - Pacific Crest Securities

Okay.

Bruce Davis

We're anticipating as the script indicates that our time is that hand, the growth rates will go up significantly. And so when we're comfortable that will be going up and there will be some investment in those anticipated future revenues. And so again following our guidance here, we feel comfortable that '09 is going to demonstrate significant higher growth rate, but '08 may or may not and that's why we'd infer that in late '08, could be some increase in investment, and anticipation of '09 having higher growth rate.

Andy Hargreaves - Pacific Crest Securities

And that would be then primarily kind of sales and marketing investments that this programs often running?

Bruce Davis

Yes, we called the front-end of the business, which would be sales, marketing and program management, the delivery of programs.

Andy Hargreaves - Pacific Crest Securities

Okay. Give us any plan on R&D plans that belong to same line, and you've got a few things that are a lot closer should expect you to flat that close on the R&D spending?

Bruce Davis

Our R&D accounting is quite complicated because much of R&D that we do can show-up in the cost of revenues as well as in the OpEx area, and as because, we try to break it out for people. Some of our intellectual property spending goes into G&A and it's really in our world product developments is not, if we're not able to come forward in that fashion. And then because of our intellectual property licensing, the R&D of others is, R&D of ours. And so if you talk about the R&D line on the income statement, I actually don't think that's going to change materially. What Mike?

Mike McConnell

It slightly increased, but nothing material.

Bruce Davis

No.

Andy Hargreaves - Pacific Crest Securities

Okay. Thank you.

Operator

Your next question will be from the line of [Kevin Henehan of KMH Capital Advisors].

Kevin Henehan - KMH Capital Advisors

Good morning, Bruce.

Bruce Davis

Hi, Kevin.

Kevin Henehan - KMH Capital Advisors

I had a question, I saw in the news, Social Security Administration was considering new social security cards, which would cost $8 as opposed to the old cardboard cards that costs $0.50 per card, and the new card we have biometric information, much more features. And I just wondered, if you'd be interested in putting the RFID on there or if you might be a sub, and if you can comment in general about the ID cards in general in the industry?

Bruce Davis

Okay. The notion of an enhanced social security card has been around for many years now. And I still don't quite know what it would mean to have one of those because, the biometrics of an infants are not very indicative of the biometrics of an adult. So, I don't know what they mean when they say, what they said. I don't think they know either, frankly.

Kevin Henehan - KMH Capital Advisors

Okay.

Bruce Davis

So, it's a concept. It's just they want to try and make social security that the birth registry is associated with a more meaningful. I don't think it's going to go anywhere, frankly. I think the number is helpful for a lot of reasons. But that's been working pretty well and the marginal utility in relation to the marginal cost for making it more secured card it doesn't have much of basis for distinction. It's probably not going to make it.

In terms of identity management, generally as you know, we participate in a number of different areas of identity management. We realize the debates have been quite helpful I think it helping citizens to understand the virtues of secured identity. And so in the dual that were done nationwide on REAL ID, the respondents maybe happy to wait longer inline and pay more money to get a better ID because it has so much meaning in their lives generally, not just driver licenses.

It's a way of opening bank accounts and establishing your identity, when you get a job and all kind of important things. And so I think that we're on a good trajectory generally in the appreciation for effective identity management, which is not just documents by the way.

Kevin Henehan - KMH Capital Advisors

Right.

Bruce Davis

Very important point that has been part of our strategy, since we entered this business about six years ago, it just the whole process, not just the documents, so we do great documents. But we're also have been building out our ability to provide the full identity management solution to our customers, since we entered the business, and that's where REAL ID is focused on the overall whole process and making it more secure.

And our customers are interested in greater security, but also greater efficiency. They want their customers to have a good experience. And so the dual pond approach of our business is to provide greater security with greater convenience to the citizen. But we think those are not contradictory goals. I think we have been done a good path here generally in identity management in the United States and globally it's a bit more difficult to characterize the market I still believe it's in the early stages of development and there is a ton of opportunity for improvement around the world.

But we focused our energies largely in the domestic market here to build coherent and efficient and secure cost effective solutions that we hope to be able to export in an orderly fashion over the coming years in the foreign markets.

Kevin Henehan - KMH Capital Advisors

Okay. And can you give us an update on, I saw the Blu-ray pretty much beat out the Toshiba product, which I guess neither matter to you, both would okay. But can you give us an updated on that and also the Nielsen rollout of their product, how that progressing as we go in to 2008?

Bruce Davis

Yeah. You are right that the choice of formats was not relevant to our participation, because we were involved with both.

Kevin Henehan - KMH Capital Advisors

Right.

Bruce Davis

What is relevant is that the assumption that analyst who once (inaudible), batter than I do have to making, which is that by getting rid of the format war is more likely more people will feel comfortable buying the product. So, it should result in the higher pickup in the early stages than would have been true with the format world were going on that. That's good for us.

And so we are hopeful of that Christmas always be a real bang-up year on Blu-ray. We also believe that IP connected entertainment devices are going to be more and more common. In other words, it will be Ethernet tracking or wireless connector on them, more and more products meaning that our technology for identifying media objects regardless of distribution channel, and these identifications will trigger for applications will become increasingly important. So it's all good news on that front.

In terms of the Blue-ray technology choices, a remainder here it goes to ambiguities that we believe will be result in a near-term. There is an interim license out, certifying watermarking as the requirement for all HD, DVD, playback and recording devices. There was some noticed manufacturers last year; we're still waiting for the final license. And we're hoping that's going to be again within the next couple of months or so that, that gets done.

Once that is done everything is done and we'll be count our money. But there is still that uncertainty in the marketplace of getting the final license published. And all of what I'm saying is available to the public on the aacsla.org website. And so we're watching, and everyone is watching through them to get that wrapped up. So, I hope that answers your questions, Kevin.

Kevin Henehan - KMH Capital Advisors

Sure. And I was asking also about Nielsen?

Bruce Davis

Oh Nielsen, yes. It's going great. We are cranked up. They are excellent partner; we're in the development stage getting the initial solutions ready for market. They will be Nielson solutions or Nielson will do the positioning of the marketing and pricing and so forth. And so I'm not going to preannounce anything as it there job to do and their right to do in their mind.

But I could say from our perspective as a development partner, that we're very pleased with the relationship, and we are cranking full speed on it. So I'm very excited about the prospects for that relationship.

Kevin Henehan - KMH Capital Advisors

Okay. Thanks a lot, Bruce.

Bruce Davis

Okay.

Operator

Your next question will be from the line of Jonathan Ruykhaver of ThinkEquity Partners.

Jonathan Ruykhaver - ThinkEquity Partners

Good morning, Bruce and Mike. Can you hear me?

Operator

Sir, your line is open.

Jonathan Ruykhaver - ThinkEquity Partners

Good morning, guys. Hello.

Operator

Check your speaker phone on-mute.

Jonathan Ruykhaver - ThinkEquity Partners

Hello, hello.

Operator

Your next question will be from the line of Jeremy Grant of Stanford Group.

Jeremy Grant - Stanford Group

Thanks. A couple of follow-ups, one just to talk a bit more about the Blu-ray opportunity, so it looks like one thing we need to keep an eye on in the next couple of months in the final license. I know it's tough to get into specific predictions of what revenues could be, but I guess the question is what sort of boom in Blu-ray sales assuming your part of the licensing agreement which translate into something that actually be material in the numbers.

Bruce Davis

That's nicely tricky question you are asking, Jeremy. Let me see if I can find a way to the web to answer it. We put out of news release a while back on this, because we anticipated that on future periods that it could be a material contributor to our financial performance. I still believe that to be true.

The volume sales of compliant devices would only begin in the Christmas of '08, and given that, we are royalty based participant in that. That would mean that there is some time lag associated with that, so in '09, probably on the middle of '09 it could become material.

Jeremy Grant - Stanford Group

Okay and follow-up on that.

Bruce Davis

And I gave all the cautions that are appropriate.

Jeremy Grant - Stanford Group

I appreciate that. And keeping an eye on the final license decision as well, would there be any upfront revenue that could come with that or this could really be a per device revenue is tracking back you as Blu-ray device sales pickup?

Bruce Davis

We're not sure on that, Jeremy. Because our participation in this is on a royalty basis with the chosen technology supplier business partner of ours and we are not attribute to all the new onsets out there business relationships and so I don't know the answer to that.

Jeremy Grant - Stanford Group

Okay. And other question kind of diving back into driver's license market again, can you just provide a bit of an update is to what's going on with different state procurements. If there is going to any news anything in the last few months in the sort of time lines of any major procurements that you expect action in the next two or three months?

Bruce Davis

We lost Virginia again.

Jeremy Grant - Stanford Group

But it is under protest right?

Bruce Davis

While back. Yes, we did file a protest in that action as we've done previously. We also come aware of that New Hampshire has made an award to another vendor, that's relatively small customer of ours, but they appear to be going with another supplier.

Jeremy Grant - Stanford Group

Okay.

Bruce Davis

There are free bids in progress California we was done in the bid process now for about 2.5 years or so. And Georgia, where they have accepted responses to the RFID and are in deliberations and Massachusetts recently accepted responses to an RFID. And so those are about the active part of the market.

We anticipate, with the finalization of the REAL ID regulations that there will be a lot of activity, whether that ends up in continuation to source negotiations or open competitive bids for us and for accounts held by other suppliers, is not clear yet.

Jeremy Grant - Stanford Group

Okay.

Bruce Davis

We are busy. We just don't know the preference of the customers as to which way they're going to go. Obviously, we prefer that just our customers stick with us and the others come our way, but, we'll see how it goes.

Jeremy Grant - Stanford Group

Okay. And the protest in Virginia, what's the timing for resolution on that?

Bruce Davis

I really can't go into the details of that situation it wouldn't be appropriate.

Jeremy Grant - Stanford Group

Okay.

Operator

Your next question will be from the line of [James Patrick Kristen Capital Management].

James Patrick - Kristen Capital Management

Good regards, to each and all of you. Bruce, I have two questions. The first one would relate to the financial market. In all these new instruments created, the collateralized debt obligations to sub-prime mortgages issuances, and the credit default swaps. And regarding the documents of sales or the emails and voice messages that pertain to them, is there a market there for you as it stands or if there would be, if they were a spontaneous combustion in these huge composed heat that extends this country into Europe?

Bruce Davis

We have proposed our technology for such things, Jim. We haven't gotten take up on yet. We don't have an active R&D effort there, but we can be used to secure and authenticate any printed materials. And so we'd be happy to help if we could, but we don't have any significant business in that area right now.

James Patrick - Kristen Capital Management

Any Central Bank does the BIS in Basle or any leading financial institutions come to you and suggest this or explore this review with the initiatives from themselves?

Bruce Davis

Well, I can't talk about individual Central Banks, because I'm only known to do business with consortium of leading Central Banks, that's the only disclosure, I'm permitted to make. I didn't know a few of them have. I have to admit.

We are very well-known in that community, and our technology is very well-known. And of our prior years, we have looked at other kinds of financial instruments like you're talking and suggested that it would be helpful.

And we actually did some R&D in some market test and so forth, but the perception of the customers is because of the large electronic network if you like that backups these documents that the marginal value we could almost not big enough to justify their deployment in paying us enough to make it worthwhile for us.

They just really rely on the network rather the documents are seen as really just symbols of the network if you like as opposed to independent value documents like money.

James Patrick - Kristen Capital Management

That's good enough, as soon as that the initiatives will have to come from them, it's not a market you can develop your own rights from the outside, but I wouldn't be surprised if someday it's had a necessities request for help.

Now the other question is, this perception of man correct if Digimarc has not in recent years been so free and clear of distractions and harassments as they are now. For instance you had some cleanup from Polaroid, you had to (inaudible) suit you had Sarbanes-Oxley, you had to move, you had some prior planning for REAL ID ahead of revenues. Any unanticipated costly harassments in your path that you can visualize now and are you now, would you always it must feel very good.

Bruce Davis

It does, again a little squeeze as you are taking the trip down number line there. Yes, things are very different now. We had made a build acquisition and taking the bankrupt company assets from Polaroid and it turned out to be a very difficult road ago, but we got it done and we have a great company now and we are ready to grow and deliver profitability to our customers - to our shareholders and good cash flow. Yes, it's a very different environment. We made it through the rough patch here and we are optimistic about our prospects and it's a lot more fun than it was during that time.

James Patrick - Kristen Capital Management

You are very much liked and highly regarded your interest in. Thank you.

Bruce Davis

Thank you, Jim.

Operator

(Operator Instructions) Your next question will be from the line of Jonathan Ruykhaver of ThinkEquity Partners.

Jonathan Ruykhaver - ThinkEquity Partners

Good morning. Could you guys hear me? Good morning.

Operator

Sir, your line is open.

Jonathan Ruykhaver - ThinkEquity Partners

Good morning, can you hear me. Hello.

Operator

Please make sure your speaker phone is on mute?

Jonathan Ruykhaver - ThinkEquity Partners

Good morning. Can you hear me?

Operator

There appear to be no further questions at this time, sir.

Bruce Davis

All right. Thanks very much everyone. We appreciate your interest and support and we will be talking to again soon.

Operator

This does conclude today's conference call. Thank you for your participation. You may now disconnect.

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Source: Digimarc Corp. Q4 2007 Earnings Call Transcript
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