Digimarc's (DMRC) CEO Bruce Davis on Q2 2016 Results - Earnings Call Transcript

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Digimarc Corporation (NASDAQ:DMRC) Q2 2016 Results Earnings Conference Call July 26, 2016 5:00 PM ET


Bruce Davis - Chief Executive Officer and Chairman

Charles Beck - Chief Financial Officer and Treasurer


Josh Nichols - B. Riley & Co.

Jeff Kessler - Imperial Capital

Rob Stone - Cowen & Company

Jeff Van Rhee - Craig-Hallum

Glenn Mattson - Ladenburg Thalmann & Co.


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.

Bruce Davis

Thank you. Good afternoon. Welcome to our conference call. Charles Beck, our CFO, is with me. On the call today, we'll review Q2 financial results, discuss significant business developments and market conditions and provide an update on execution of strategy. This webcast will be archived in the Investor Relations section of our Website.

Please note that during the course of this call, we will be making certain forward-looking statements, including those regarding revenue recognition matters, results of operations, investments, initiatives, perspectives on business partners, customers and prospects, industry trends and growth strategies. We will also from time to time discuss information provided to us by channel partners and actual and potential customers about their business activities.

Please appreciate that we are providing this information as we understand it was represented to us by these customers and partners and we don’t verify nor vouch for such information. Such forward-looking statements and statements of our partners and customers 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 the Form 10-Q that we expect to file shortly.

Charles will begin by commenting on our financial results. I'll then discuss significant business developments, market conditions and execution of strategy. Charles?

Charles Beck

Thanks, Bruce. Good afternoon, everyone.

Revenue for the quarter was $5.5 million compared to $5.8 million in the second quarter of last year. Most of the difference was due to lower service and subscription revenue. Service revenue was lower due to less program work with a government contractor; subscription revenue was lower due to completion of revenue recognition on a confidential software license.

We anticipate that the more well-established areas of business will grow at modest rates. Our revenues from Central Bank work are expected to uptick in the second half of this year and grow at a higher rate than in the past couple of years due to increased program requirements, at least through 2017. Revenues in these areas may vary quarter to quarter due to timing of program work and swings in reported royalties from our licensees.

Gross margin was 62% for the quarter, four points higher than the second quarter of 2015, due to lower costs from improvements to the operating model for our Guardian product line made over the course of the last year.

Operating expenses were $1.3 million or 17% higher than Q2 of last year, reflecting previously noted increases in staffing for sales, marketing, engineering, research and development and operations to support our market development activities. As a consequence, the net loss for the second quarter was $5.3 million or $0.62 per diluted share versus a net loss of $4 million or $0.50 per diluted share in the same quarter last year.

Our working capital position remains in good shape with nearly $32 million of cash and marketable securities and no debt. We invested $4 million of our working capital during the second quarter, including $3.1 million to fund operations and $500,000 for capital expenditures.

Cash usage so far this year of $7.3 million is lower than we projected at the start of the year largely due to timing of customer receipts and vendor payments. There have been no substantive changes in our rate of investment. We expect that cash usage in Q3 will be in the range of $4 million to $6 million.

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.

Bruce Davis

Thanks, Charles. Digimarc Barcode is a powerful improvement on the traditional barcode with higher performance and broader application. We’re building a multi-faceted ecosystem through our partner program to support effective and efficient globalization of our platform guarded by 18 years of experience in developing a globally deployed bank note counterfeit return system with leading central banks.

The partner program is a key element of our market development strategy. It allows us to focus on our core competence in identification and discovery technologies, while serving as a force multiplier in sales, marketing, customer acquisition, quality assurance and service delivery. The program provides ready access for customers to multiple sources of supply, fostering growth and globalization and facilitating early adoption.

Customers can obtain the benefits of the platform via well established trusted supplier relationships, bypassing many of inefficiencies associated with establishing new supplier relationships. Importantly, for our shareholders, the program is intended to provide Digimarc with operational and financial leverage that will expedite progress toward timely realization of our vision and mission.

Since our last call, we've been improving training, coordination and support for previously announced participants. We’ve also added several new partners some of which I will highlight in more detail later. As the number of partners grows, our company’s access to prospective customers and ability to serve them is expanding significantly. We are beginning to observe the benefits of this leverage.

We began the year with an announcement of numerous key strategic supplier relationships. We've been operationalizing and optimizing the partnerships in the months since then. One particularly important partnership announcement of interest was our collaboration with GS1 US. The official launch of our collaboration took place at GS1 Connect Conference in Washington D.C. June 1 to June 3.

We were prominently featured at the conference, including a DW Code Experience Center, Digimarc Discover exhibit and demonstration, inclusion and keynote remarks and a panel including presenters from GS1, Wegmans, McCormick & Company, the consumer spice company, SGS and Merial, a provider of animal health products.

A GS1 US executive opened the workshop with the following statement, “Over 40 years ago, the barcode revolutionized the world providing benefits for everyone, companies, communities, and consumers all that benefited greatly from this common and universal standard and today we're doing it again.”

The Vice President of Global Packaging Innovation at McCormick & Company, the $10 billion global leader in consumer spices and seasonings, spoke about how Digimarc Barcode allows packaging to become a platform for consumer engagement in-store and at home, ultimately serving as a portal to online information about the brand, delivering mass personalization and rich mobile experiences.

The SCS representative continued with a theme of the package as a portal to the digital world as consumers increasingly want and expect more timely and accurate information about products at the point of purchase, use and reorder. Merial, a leading supplier of pet healthcare products to veterinarians, talked about the use of Digimarc Barcode to mitigate great market diversion risks.

Wegmans noted that penetration of Digimarc Barcode in their private brand products was achieving significant scale, providing details regarding the pace of adoption. The company represented – Wegmans brand includes 4,000 SKUs. As of the date of the conference, 1,400 of these SKUs have been enhanced with Digimarc Barcode and 400 of these products have made it to the shelf.

He noted that all new product packaging includes Digimarc Barcode and that existing product packaging is being upgraded as labeling changes occur or labeling inventories are depleted. He noted their belief that Digimarc Barcode will improve productivity, increase customer satisfaction, make life easier for cashiers and simplify checkout.

He said that they expect an impressive ROI, based on a forecast of $2 million in annual labor cost savings for every item per minute improvement in scan speeds. Those of you who have watched our video demonstrations or witnessed firsthand the remarkable improvements in scan speed made possible by Digimarc Barcode can appreciate the compelling value proposition you see in our platform.

During the second quarter, we continued to nurture relationships with some key customers, engage a rapidly broadening range of prospects both here and abroad, improve support for scanner, brand deployment, smartphone and media and entertainment channel partners as well as expand our service and support capabilities.

We had tremendous support from global leaders and retail scanners. Datalogic, Honeywell, MCR and Zebra all showcased products enable to read Digimarc Barcodes in their exhibits. Last week, Zebra announced the availability of Digimarc Barcode enablement in their flagship retail scanner. Other industry leaders are readying Digimarc-enabled products for release. We expect several Digimarc-enabled fixed and handheld product releases from these vendors later this year.

We believe that the industry transition from laser to imaging is well underway. More unannounced scanner vendors have begun [duration] of Digimarc Discover, broadening the range of automatic identification and data capture solution supported by our Digimarc Barcode.

One such expansion area previewed with interest by Bizerba is variable weight product labels used in grocery, butcher, deli and fresh foods departments. Several scanner vendors are planning offerings in this area. Another area under development is manufacturing quality control for consumer products. Leading vendors in this space are engaged with our engineers.

As you know, we focused our resources on marketing and demonstrating improvements to front-store operations for retailers in the US market. Despite this, the breadth of applications being studied and developed and globalization opportunities in key foreign markets are emerging earlier than anticipated. We are adjusting our execution strategy to support these expanded use cases and important expressions of interest from overseas including a senior level staff additions announced recently.

There are expansion initiatives underway in Japan, Europe and South America. Plans are being developed to address growing interest in the platform in other geographies as well. GS1 is a wonderful ally in formulating plans to facilitate timely, effective and efficient adoption of Digimarc Barcode around the world.

The first glimpse of this expansion came earlier this week with the exciting announcement by Dai Nippon Printing and SATO Corporation, a formation of the shopping for the future study group in Japan by 17 companies including many notable industry leaders to lay the ground work for successful implementation of Digimarc Barcode in that market.

The group is led by Monic Corporation, our long time partner in Japan, and by packaging the label industry leaders Dai Nippon and SATO. DNP and SATO have been studying Digimarc Barcode for years and believe the time is at hand to prepare for a launch. Numerous working groups have been formed around key topics in early market development and members of this study group include top retailers and brands and their suppliers.

Our CTO will be presenting at the ECR TAG conference on September 21 in Berlin. His topic is the connected packet from brand expression to digital experience. The conference is being organized by GS1 Germany. ECR stands for efficient consumer response. ECR Europe was launched in 1994 to help make the grocery sector more responsible to consumer demand and to remove unnecessary cost from the supply chain. More than 800 participants from consumer products industry are expected to attend.

Back in the US, with respect to retailers and brands, The Seasons, our second publicly disclosed retail customer has begun production. We have been making headway in developing a trusted supplier relationship with another large regional grocer, much larger than Wegmans.

We are integrating Digimarc Discover into their smartphone application and they have signed up for Digimarc Guardian to protect their digital assets. We have engaged with them in trials for their packaging, but we do not yet have a commitment to production from them.

We’re also at the proposal and pilot stages with other much larger retailers regarding private brand product package enhancement subject to confidentiality restrictions. We and our partners are meeting with many leading consumer products manufacturers. We’re entering into pilot production with a leading consumer products company following successful technical trials and in parallel working to establish commercial framework for an enterprise license and providing collaboration on the platform.

Elsewhere there is considerable activity going on in food products due to significant federal policy initiatives affecting packaging design, including legislation concerning nutrition facts panels and GMO disclosures, genetically modified organisms. Digimarc Discover has enabled many smartphone applications.

We understand the brands need platforms like Discover to facilitate smartphone engagement with the consumers and thus are aggressively marketing Discover to retailers to provide brands with a choice of third party engagement and retail applications to support consumer engagement. Wegmans was our first retail licensee. We have other unannounced retailers who have or are currently integrating our SDK.

We believe we're making great progress in execution of strategy. We’ll continue to keep you well informed of details of the development of the market as much as I am permitted to by confidentiality restrictions and guide you along the path that we anticipate to follow. I hope you're increasingly sharing my view of the critical role our platform will play in the global supply chain and the emerging Internet of Things.

The EPC barcode was transformational. We believe we've invented EPC for the digital age, the barcode of everything. Our platform is new; customers are understandably cautious about adoption. We are working through technical feasibility, pilot production, functional demonstrations and other risk management processes you might expect are natural to what we believe is a mission critical technology. There is obviously much more to be done and continuing investment is necessary to meet our goals. I greatly appreciate your confidence and support as we progress on this journey.

I noted in our last call that our near term operational priorities included encouraging public disclosure of support from industry leading retailers and brands, implementing the GS1 collaboration, launching new scanners with Digimarc Barcode capability, deploying Discover in more retailer and consumer engagement mobile apps, activating training and incentivizing our channel partners, improving our website as an engine of commerce and increasing positive cash flow from Guardian and payment areas of business.

I tried to summarize our progress in each of these areas on today's call. I noted some changes in opportunity and execution related to market interest in a broader range of applications and an earlier need to support foreign market development than anticipated.

As we've discussed from time to time, we continue to generally encourage early public disclosure by our business partners and customers. I'm frequently reminded, however, by those who we're working with that we have not yet been given permission to publicly disclose their work and that they desire to keep that work confidential. We will honor those requests.

I'm grateful to those who are familiar to visibility, including Wegmans, New Seasons, JM Smucker, McCormack and Mariel. We will continue to do all that we can to provide timely updates regarding progress on the path to revenue growth and profits. Our focus is on increasing sales for Digimarc Discover and Digimarc Barcode, building credibility for a prosperous future for our company and its remarkable intuitive computing platform.

That’s it for our prepared remarks for today. Now, we will open the call for questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Josh Nichols with B. Riley & Co.

Josh Nichols

I was wondering if there's anything you can elaborate on as far as the pipeline or some licensing data points now that GS1 launched Digimarc-enabled DW codes? I know it's still early, but is anything being sold in the early but yet potentially meaningful way?

Bruce Davis

If I understood the question correctly, it was about pipeline and I think I'm saying all I believe I can say about that. I'm trying my best to be sufficiently vague so as not to endanger business relations, but as informative as I can be within that constraint. So we and our business partners are meeting with lots of retailers and brands.

And as I said in the prepared remarks, the leverage that we presume would come from the program appears to be developing as anticipated. And so we're having lots of engagement, but when we get a contract that we can announce, we will, and absent that give as much indications we can of how things are going. But I don't know that there's anything more that I could say.

Josh Nichols

And I know a lot of the focus has been on barcode, but anything you could say regarding some interest or what you're seeing in the market regarding the larger Discover platform as it pertains to other forms of media?

Bruce Davis

As I think most people on the phone know, Digimarc Discover software has a seamless multi-modal discovery of things using conventional barcodes QR, Digimarc image and audio barcodes and we are licensing that generally to consumer engagement applications and to retailers. We have picked up more retail business that we can’t specify. And we are engaged increasingly in public policy discussions and potential regulatory developments associated with federal legislation concerning the nutrition facts panel.

All food products, consumer packaging for food products will need to be revised by July 2018 to include a new design of the nutrition facts panel. That's a wonderful opportunity for us as we've talk to brands to say as long as you're revising all your packaging why don’t you go ahead and modernize it with Digimarc Barcode. So it’s a very healthy policy-driven market development.

Then, there was a law passed regarding genetically modified organisms in food products in Vermont and it caused a panic in the food industry which led the Congress to rapidly pass federal preemptive legislation that is now pending the President's signature. And so in that legislation it's contemplated that the manufacturers would have the right to deliver the GMO information via the Internet and so we're trying to make sure that Digimarc Barcode is one of the means available to do it, if not the preferred means to do it.

But that law is on the President's desk and hasn't been signed yet. And so you see the coalescence of two federal policy initiatives putting additional pressure on packets designs which are already overburdened with messaging. So [they run not a real estate] and it seems that they only answer will be dynamic information provided as a point of purchase and point to use and reorder to consumers. We believe we're the ideal trigger for that.

We also published research earlier this year about the growing desire of consumers for information independent policy initiatives. So there's a very powerful movement afoot here from the consumers and from the government to make more information available at point of purchase. And I think that's a very healthy market development for us.


Our next question comes from Jeff Kessler with Imperial Capital.

Jeff Kessler

I'm wondering if you could talk about some of the infrastructure challenges and plans you have for moving into foreign markets? Again, I realize it's early. Are there differences in the way you're going to have to approach these markets? Is it going to be country by country by country, particularly in places like Europe? And is this the type of thing that will entail some type of different type of marketing, different type of packaging, different type of scanning and infrastructure than you've had in the United States?

Bruce Davis

Those are lot of questions piled into one, I'll see if I can try to answer them all. Let me know if I missed something. So we had wanted to focus on the US and particularly in the collaboration with GS1 US on building on an exportable collaboration model. The foreign markets are too anxious to get going. It won't wait. And so in Japan DNP and SATO Corporation, who are very large powerful companies, wanted to move forward with the study group. They wanted our consent them participation to do that, to prepare the market for development.

The Japanese industry operates very differently than the US. And so in their model and one of our conditions of allowing them to move forward was that it would be an open collaboration where any company could participate. So although there were 17 we mentioned in our releases already and 18th has to join, I expect there will be many more. And their purpose is to do the work in an efficient manner.

And so I expect actually the Japanese model is going to work a lot better than the US model because of that open collaboration, whereas in the US you’ve heard me complain from time to time about needing to do the same study, repeatedly getting the same results, while in Japan that is likely to not be necessary because they will make available to the study group participants the findings from such research. So I think it's going to be a very productive group in the study group and a very good model for introducing a transformational technology to their market. So that's a big difference between Japan and the US.

In Europe, really our initial presentation there will be at this ECR TAG Conference. We have a representative in Europe, but we've sort of been trying to keep it on the backburner. It's now going to move to front burner and that's because of expressions of interest that we've received through business partners and directly from prospective customers there.

So Europe is less mature in terms of the approach that we're going to be using than Japan and I went to Japan and met with these companies and formulated our strategy with them. And in South America, it’s even more nascent. And so we will have more to report on that little further down the road.

But then one of the primary goals of the GS1 relationship is to lay a foundation for a global standard based on Digimarc Barcode. And so in all cases we will be coordinating with our primary partner of GS1 US and GS1 US and us will be coordinating globalization with GS1 Global, the over-arching organization of the 120-plus member organizations of GS1.

So we have a common goal in all the markets of having interoperability, but there will be significant differences in each of the markets in terms of who the primary vendors are and certainly in terms of language differences and cultural differences [indiscernible] and so forth. All of this is very important to the global brands in consumer products that we're already engaged with because even though some investors might be thinking because we're focused on the US that means that we're working on US products.

If we're working with a global brand, most of them distribute their products in many, many foreign countries, sometimes more than 100 foreign countries. And if we're going to be a part of the particular product presentation, it's probably going to be globally. So we need to build this framework in which we can become a key element of the global supply chain as over the last 40 years the conventional barcode has become, because we think that we do what it does better and we think that virtually everyone that we deal with agrees.

So it's really what the process to getting to that global platform and we're trying to measure our use of working capital in a sensible manner to maintain confidence of sources of capital that we're providing adequate evidence of progress toward those goals to maintain our access. So we're cautious in how we approach these things, but we know where we want to end up, which is with adoption everywhere for the full range of applications awarded by the current EPC. So I hope that answers most of the questions in your question.


Our next question comes from Rob Stone with Cowen & Company.

Rob Stone

I wanted to follow up on your comments about nutrition fact panel. So effectively 100% of consumer packaged food items for the US all have to have a new label in two years time from now? Did I understand you correctly?

Bruce Davis

Yeah, the legislation has been passed, so it's a law. And I believe there are some small exceptions, but let's say essentially all food products.

Rob Stone

So I mean it seems like as you've been working on this and we've been observing it, the challenge has been all around getting the first couple of sheep through the shoot. Do you get a sense that the nutrition panel plus soon to be added GMO issue perhaps add some sense of urgency, so that there won’t be so much time spent doing as you noted repeat of the same test to get the same result?

Bruce Davis

The packaging of consumer products in general is under a great deal of stress. We had sort of theorized that these things would happen and now they're happening. So the facts are supporting our assumptions of our strategy we laid a few years ago. And of course we didn’t know all these things will be happening. But if you think about the real estate of a package, if you observe next time you're in the grocery, how much room is left to put more stuff on there, it can't go on like this.

They have to move the source of information into the Internet and then they have to have a convenient and reliable user interface for consumers and we think we have both sides of that, the Digimarc Barcode being the best trigger and Digimarc Discover being the best discovery software for smartphones. So we think we're right in the sweet spot of this change going on in the marketplace.

And the sort of frustration and not quite a panic yet, but there is great concern that industry has, much of this concern has coalesced around Grocery Manufacturers Association initiative called Smart Label. So it's the GMA Smart Label initiative. There are many, many brands involved in that and that initiative started several years ago. And they had presumed that they would use QR as a trigger and so we are presently increasingly engaged in the discussion about how Digimarc Barcode can serve the interests better.

And so we will see where that goes. But that’s the embodiment of an industry reaction to the policy initiatives and then the desire to provide reliable information at point of purchase and point of use reorder for consumers as a broader interest of industry that we obviously serve very well. So all of these factors are positive factors affecting the likelihood of adoption and the pace of adoption.

Rob Stone

So it this like so many other examples of federal legislation going to be left up to some regulator or other to work out the implementation? You mentioned being engaged with this process, is it FDA or somebody that’s – Department of Agriculture, who is going to eventually be putting this down to details? Is it possible that barcode becomes one of the acceptable solution, i.e., is recommended for implementation by the regulators?

Bruce Davis

Yes. So it’s the FDA and as you know because you know our long history, we used to spend quite a lot of time in Washington and we're familiar with the town and how things get done there. And so after many years since the ID system sale of not having much interest in what's going on there, we have to now go back to Washington and hang out a bit and make sure that everyone does the right thing.

So we know how to do it. So that's another area in which our strategy is being modified a bit here. We’ve got to go and spend a little time in Washington to make sure the policymakers make good judgments. But we have here the great virtue of having three industry associations on our side, the GS1 obviously, GMA and FMI, or the Food Marketing Institute. So all three associations believe as we do that the solution to this problem has to reside in Internet based delivery of critical information to consumers and that we are the best means of delivering that.

Rob Stone

So a couple of housekeeping questions maybe for Charles or you, Bruce. One on OpEx which were down – up a lot year over year, but down a bit sequentially with new hires and so forth, how should we think about the back half of the year versus the first half in terms of further run rate of expenses?

Charles Beck

Expect a marginal increase in OpEx kind of in the second half of the year. We kind of delayed our hiring plan a little bit, been very selective in our hires and so obviously we announced two pretty notable hires that are coming on board and those will obviously add to OpEx a little bit in the second half the year, but there's some other positions there too as well.

Rob Stone

My other question was you mentioned that the gross margin improvement had to do with cost reductions related to Guardian. So is this new level of gross margin for the subscription segment sustainable or are there other things that might cause that to come back down towards the level that we've seen over the last few quarters?

Charles Beck

Yeah, I think for the Guardian business it's certainly sustainable. I think there's additional opportunities to reduce costs even more although probably not as significant as the reductions we've currently made. But we’re continually focused on those costs and finding ways to automate processes and just be more efficient overall.

When you talk about the subscription line in general, as Barcode and Discover revenue grow, obviously that's a lot higher margin business than Guardian itself. So the composition of revenue within that line item will impact margins going forward, but the Guardian business itself is certainly sustainable.


Our next question comes from Jeff Van Rhee with Craig-Hallum.

Jeff Van Rhee

A couple questions from me. First, Bruce, you spent a lot of time and effort building out the ecosystem, pretty methodical approach here, can you talk a bit about the ecosystem in particular I think about the ability to onboard SKUs with respect to package designed bringing the label in, you've trained some partners that you've been very visible about, I think you referenced some others that maybe haven't seen the light of day.

Can you just talk about how that build has evolved? I think it might give us a better picture of the ramp in the infrastructure you’re building, maybe you could talk about number of people that have been trained and are capable of bringing SKUs on board and how that might have changed over the last three, six months.

Bruce Davis

So I’ll call it brand deployment aspect of the partner program includes [indiscernible] publicly announced. There were others involved who were not yet publicly announced. So we will try to get that information to you as soon as we can. But in all of those cases, we are expanding our client engagement reach as I mentioned in the prepared remarks by allowing a trusted supplier to sort of put a check box on existing agreements as opposed to us going in and spending all the time and resources necessary to negotiate direct agreements.

In those relationships then, we're encouraging our business partners and some of them have design firms that work with them to work with us as we continue to develop the toolset to allow for the implementation of Digimarc Barcode in an original design rather than post-processing. And we're ramping up our work in that area because I believe that the design community is a source of friction that we can mitigate and even convert into a motivator rather than an inhibitor of adoption by making it possible for designers to remain in control of their art.

So in the first phase of market development, we necessarily said let’s send all your stuff to us. In the next phase of market development, we'll be transitioning the tools to the designers so that they don't have to surrender their art. And we think that that's going to be a very productive change in our approach here and it's a natural evolution of a platform that I hope everyone appreciates we’ve been anticipating for a long time. So we're trying to move quickly on that.

As we make those tools available then those business partners, companies like SGS and [Schawk and Parago] are in fact quality assurance providers. And so we're working with them on scoring mechanisms, on quality assurance processes and on making the tools accessible to a broader audience. So the training that we're doing with them is both training and R&D as we're training their top designers in how to use the tools, but also getting feedback on how to evolve the tools to make them more broadly available.

In terms of the number of graphic artists who have been trained, I don't personally know that number. My guess is it’s least dozens, maybe more than 100, I'm not sure, but at least dozens so far. But again, I think Jeff you know the endgame here is actually much as we've done with the central banks, money now is designed with Digimarc Barcode as an aspect of design.

That's where we want to get to in the commercial sphere and I think we're making good progress toward getting there, but we're not there yet. And that's where those channel partners will be most effective is when their designs that they provide to their clients are just Digimarc Barcode enabled from inception. And we have some work underway with a customer, a retail private brand that’s doing just that.

So they're kind of on the guard, it’s not Wegmans, it’s an unannounced customer. They're on the other guard of this notion that every product should have Digimarc Barcode enablement in it. And you heard me we count the Wegmans representative that – but Jeff [indiscernible] Wegmans also, every design going forward will be Digimarc Barcode enabled. So that's where we're heading to as quick as we can get there.

Jeff Van Rhee

Just shifting gears then with respect to GS1, obviously a tremendous partner. They've gone live. Can you just talk – the original, I guess, coming-out party had talked a lot about joint engagements, speaking, training, et cetera, education. Can you talk about what's been done, what's to come in the next six to 12 months, any direct fulfillment through their side of DW Codes? Have you worked out the kinks, has that gone smoothly? Just an update of how that relationship is actually playing out on in the field.

Bruce Davis

So we announced in January and then we sprinted to their conference, I'll say, we had a few very important things to do. We have to get integrated into their website and develop the coordination there for processing orders from clients. And we need to get ready for their conference in June for the launch and there was a lot of work done on that. So we've quite wrapped a little bit since the conference and we're convening our marketing and sales folks to get together shortly to plan the second half activities. So I don't have the plan for it yet, but we're going on it and we're going to do a detailed planning session to build out a plan for the rest of the year very soon.

Jeff Van Rhee

And if you're able to say, has there been any direct fulfillment through GS1 at this point?

Bruce Davis

I can't say yet. I don't think there's been a lot of activity and that's because we haven't yet marketed it. We just made it available on the website, that's part of what will be in the agenda for our upcoming summit to plan the second half marketing activities. So we need to do some marketing to let people know it's available and to let them know how to use it. So what we got done by the conference I thought was quite impressive and that is just the implementation, but there was no marketing program associated with it.

Jeff Van Rhee

One last if I could. Certainly, I think Wegmans laid out the case at the GS1 Conference and there seem to be a lot of other examples of the value proposition from the retail, particularly the store brand side. Would you talk to the CPG brand owner's side with respect to the ROI? Obviously, some have been willing to come out and say that you're working with them. You're working with a lot of others. What is bubbling to the surface in terms of the rank order of how they're justifying the ROI? What do they see as the key drivers from a CPG, not a store brand, but a CPG brand owner's desire to adopt?

Bruce Davis

So we have a slide deck on the website about the consumer products lifecycle. It has about 30 applications referred to on the slide. And so that slide is intended to answer the question you just asked. And so the answer goes something like this that when selling to a large CPG, if we do the executive level presentation, they go, wow, wonderful, amazing, transformational and then we go, okay, who is buying, right?

And then everybody sort of looks at everybody else. So what we have done is a matter of sales tactics. After having such an introductory meeting, I tell our sales execs find someone with a budget, right. And so if you’re looking those applications, they span the entire life cycle, so obviously various functional departments of any CPG. Any one of those applications, we believe, would provide sufficient value to justify the entire cost of implementation for the enterprise and that’s the model.

So the $50 per package is meant to provide access to the platform and then the value is derived from applications built up on that access. So it actually varies considerably from company to company depending on who is willing to champion the cause and apply their budget. So there is no single answer. I think the greatest level of interest, if I was going to try to characterize among all of the CPGs that we talk to what’s the most common theme, I think it has to do with the packaging real estate being exhausted in light of increasing demands for information, so either regulatory concerns or marketing concerns, how to make it easy for consumers to use their smartphones to shop because they really want to use them.

They're still not scanning routinely across a broad spectrum of consumers. So how do you get that platform available for everyone and then how do you make it really easy and effective and provide good quality results for every scan, all right. So there is a lot of work going on in those areas. That's a squishier ROI and then I can reduce my defects in manufacturing, I can improve my efficiency in distribution or I can make my retailer happy and maybe get more shelf space. So even though it’s the broadest I would say common interest, it’s not necessarily the most compelling value proposition.


[Operator Instructions] Our next question comes from Glenn Mattson with Ladenburg Thalmann.

Glenn Mattson

Bruce, a question, just parsing some of the phrases you used regarding some of these customers, you talked about the one large regional grosser who was mainly, I think you said, using Guardian for the digital assets, but also trials on packaging, could you explain what they're using Guardian for exactly?

Bruce Davis

Let's just call sort of nose under the tent. I mean, we’re trying to build the relationship with them and so they're doing some baby steps here. So the Guardian implementations would protect their digital assets just like any brand would use Guardian for images. So it's a Guardian for images solution provision. But they also have the licensed our SDK for the mobile app. So we're chipping away. On the packaging front, we’ve done some trials with them, but we haven't gotten them to yes yet. So we're continuing to work on that and so that would be a very nice development if we can get that piece of business, but I still have to work on it.

Glenn Mattson

And then you said, I think, proposals with other large retailers, is that a step beyond what you've said in the past which was either trials or some other language like that?

Bruce Davis

You know it’s hard to comment on this sort of abstractly, every day there's new news. It’s not real linear and predictable, but right now there are some very large players in brand packaging who seem really psyched to get going. I never really count them until I've got the contract in hand and the production has begun. But there's a lot of interest among very important players who appear to want to get going, but we don't have them in house yet. So that's what I was getting out

when I called proposal stage, they're going – give us proposals, what kind of deal can you give us, we’d like to get going, how do we get going, all of those kinds of conversations are going on. But if we get actual production I will characterize them differently.

Glenn Mattson

And then other retailers are implementing the SDK, I believe you said. Maybe just explain why they would do that ahead of – could you use your app say without adopting Digimarc Barcode or Digimarc Discover? Would there be a value to someone to do that, or is this something you think people are doing to lay the groundwork ahead of a bigger campaign or anything like that?

Bruce Davis

Well, the motivation can vary, but the structure of Digimarc Discover has a broader footprint than Digimarc Barcode. We have built what we think is industry leading conventional barcode and QR code reading capability. So you could buy QR code or conventional barcodes and we believe we would be riding superior price performance. So it depends on licensee, what their motivation is.

But in every case, they get future proofed. That was my point with the licensee, the grosser licensee, SDK, is that – now we can show them a few more things, right. So it's kind of this nose under the tent notion that Discover can be a means of getting engaged with the accounts and then showing them that even though we do a great job with commercial barcodes, if you adopt Digimarc Barcode, it’s going to work even better.

Glenn Mattson

Charles, just a clarification, you talked about an increased growth rate or an uptick in the Central Bank in the second half of 2017. What kind of magnitude are you talking about as far as the uptick there?

Charles Beck

It’s still kind of single digits, but meaningful compared to where historically the business has been, 3% to 5%, so add on another single digit growth factor to that.


Ladies and gentlemen, at this time, we have reached our allotted time for questions. I will hand the program back over to Bruce Davis for any closing remarks.

Bruce Davis

Thanks very much everyone for your support and interest. It’s a pretty exciting time here in mid-year, obviously there's a lot of activity going on and opportunities to expand our reach which we hope will bring some tangible results you can get excited about in the near future. We're continuing to manage the business carefully as we pursue these new opportunities, but we have a plethora of opportunities to nurture. So we will look forward to talking to you again next quarter and giving you an update. Thanks very much and good bye.


Ladies and gentlemen, this does conclude today's conference call. Thank you for joining us.

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