Digimarc's (DMRC) CEO Bruce Davis on Q2 2018 Results - Earnings Call Transcript

Digimarc Corp. (NASDAQ:DMRC) Q2 2018 Earnings Conference Call August 1, 2018 5:00 PM ET

Executives

Bruce Davis – Chairman and Chief Executive Officer

Charles Beck – Chief Financial Officer

Analysts

Rob Stone – Cowen and Company

Marc Weisenburger – Convergint Technologies

Ilya Grozovsky – National Securities

Jeff Bernstein – Goldman Sachs

Kevin Hanrahan – KMH Capital Advisors

Operator

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

Bruce Davis

Thanks. 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. We’ll archive this webcast in the Investor Relations section of the 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, perspectives on business partners, customers, prospects, industry trends and growth strategies. We’ll also, from time to time, discuss information provided to us by channel partners and actual and potential customers about their business activities. We are providing this information as we understand it was represented to us. We do not verify nor vouch for such information.

Such forward-looking statements and the statements about 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 this conference 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 will then discuss significant business developments, market conditions and execution of strategy. Charles?

Charles Beck

Thanks, Bruce. Good afternoon, everyone. Revenue for the quarter was $5.4 million, down $200,000 from the second quarter of last year due to lower license revenue. License revenue was lower year-over-year, reflecting the impact of the fully paid up license we entered into in the third quarter of last year.

Foreign exchange for $3.5 million license fee, we waived any future royalty obligations from this licensees in one of the licensed fields of use. Service revenue was essentially flat. The effects of growth in Digimarc Barcode revenue were largely offset by decline in Digimarc Guardian revenue. In regard to revenue composition, we expect service revenue to continue to grow in the single digits but vary quarter-to-quarter based on timing of when services are performed.

License revenue should remain relatively flat though with some variability quarter-to-quarter. We anticipate Guardian revenue to be flat to slightly down as we have minimized our investments in that area of our business. And for Barcode revenue to grow as bookings grow. Digimarc Discover and Barcode bookings were $200,000 during the quarter versus $100,000 in Q2 last year. We expect lumpiness in quarterly bookings in early stages of market development due to timing and varying provisions affecting bookings.

Gross margin for the quarter was 59%, down 3 points from last year, reflecting the impact of lower license revenue. Operating expenses were $1 million higher than the second quarter of last year, due to increased staffing in sales, marketing and operations to enhance our ability to deliver the benefits of Digimarc Barcode to retailers and brands.

Net loss for the second quarter was $8 million or $0.71 per diluted share versus a net loss of $6.9 million or $0.68 per diluted share in the same quarter last year. We invested $6.9 million of working capital during Q2, which was slightly lower than the low end of the range we provided on our last call. We used $6.2 million to fund operations and $400,000 for capital expenditures. We ended the quarter with $56.8 million in cash and marketable securities.

We anticipate cash usage will be between $7 million to $8 million in the third quarter. Our projected cash usage for Q3 is higher than Q2 reflecting differences in the timing of customer collections and vendor disbursements. We intend to hold around the same level of operating expense we invested in Q2 until we see sustainable uptick in the topline. We believe that we have sufficient resources supporting identified programs for specific customers to drive near-term revenue growth. We are focusing resources on these opportunities. There are many factors affecting the timing of revenue growth. We are doing all we can to shorten the critical path. 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 provide his comments on significant business developments, market conditions and execution of strategy.

Bruce Davis

Thanks, Charles. I noted on our last call that we have contracts with two of the top five largest retailers and one of the top five largest CPG’s in the world. And now we’re working with these companies to scale their use of our platform in terms of volume and breadth of applications. We expect to success to serve as a tipping point for the industry, accelerating the pace of adoption more generally.

Our near-term financial performance will be heavily influenced by the pace and outcome of pending contract negotiations with certain customers and prospects. The cash flow assumptions, that Charles mentioned, do not include the effects of successful completion of these negotiations. We are not only emphasizing discipline at the level of spending in the meantime, we are continuing operations to improve – efforts to improve our operational effectiveness particularly in the comp management and delivery.

Our current focus is on facilitating enterprise business transformation in large format grocery and general merchandise and in the warehouse club channel. We offer the opportunity to benefit from many enhancements in store operations and shopper engagement via our Intuitive Computing Platform. Enhancement of media with Digimarc Barcode lies at the foundation of this platform.

We are expanding the enhanced media footprint with major key customers lighting up relevant auto ID interfaces and developing or supporting basic applications. Key areas of focus include packaging, thermal labels on fresh products, hang tags on apparel, shelf labels, print catalogs and retail ready packs and other in-store materials.

Lately, spurred by customer interest, we have begun exploration of enhancement of shipping labels. Scanner vendor participation is expanding in the number of scope to provide reliable and efficient discovery of the Digimarc Barcode and media in support of that neutral portfolio of applications aimed at improving store operations, consumer engagement, manufacturing quality control and logistics.

Increasing the coverage of media and deployment of discovery capability feeds expansion of applications that increase the value of the platform to enterprises on their customers. The financial and operational leverage of platform increases at a much higher rate than this cost. The early stages of deployment of are very important in laying down this foundation in leading accounts to the journey to broad deployment and greater commercial success from the modernization of their businesses.

Financial and operational leverage as magnified by CPG participation. We are making very good progress in multiple CPG brands influenced by one of our large retail customers. We expect several SKUs of national brand products to reach the shelves in Q3 in the silent pilot where the plan to follow on with dozens of more SKUs prior to year-end, all-in support of various programs planned for 2019. Several other vendors are considering following suit. The obvious broad relevance of our platform requires that we orchestrate many aspects of account management, leaving us to make several senior level hires in sales, business development, partner and product management.

Now the restructure areas of our business involved in the account assessment, solution architecture, tools development and delivery. We have made great progress lately. I believe that these changes will facilitate achievement of the market momentum that is core to our over strategy. We are doing all we can within the constraints are responsible working capital management to deliver the tipping point and momentum that we anticipate. Interest and the number in scope of engagement is growing. Participation by suppliers is broadening, and our partner network is becoming more capable.

We have strong industry support from retail market leaders. We appreciate the need to demonstrate revenue acceleration and provide other evidence of their support to the capital markets. We have an increasingly broad range of activities that one of our key customers. Tests are underway with another key customer with Digimarc-enhanced hang tags for apparel in stores as we had anticipated. The products are in the stores.

Our initial assessment is that they look and work fine. Now we must orchestrate the merchants and their suppliers to achieve scale. The first enhance private brand consumer package good for this retailers is moving through approval and may reach the stores during this quarter. We are presented the case for thermal level adoption in our awaiting customer feedback. We’re working with another large retailer and a suppliers on a plan for implementation of our platform. Beginning with the enhancement of private brand package goods and thermal labor fresh products.

Contract negotiations are continuing with this retailer and with the large CPG. We are engaged with an increasing number of CPG’s across a range of applications. We are aiming to bring -- begin our first European packaging pilot later this year after careful study of how best to develop territory. As I said in our last call, our negotiations with retailers would benefit for more evidence of adoption among leaders in the U.S., thus we will stay the course of modest investment for the time being. In Japan, study group activities indicate there are many opportunities. We have an ongoing work with OEM partners on a few specific projects.

We are in the process of scoping some important R&D with a global leading CPG. The Ministry of economy, trade and industry of the Japanese government mandated a convenient stores in Japan attach RFID tags to all products by 2025 to address cashier, labor shortages and changes in consumer shopping behavior. The primary objective is to reduce congestion at checkout. We have proposed a Digimarc Barcode be considered as a complementary means of accomplishing these objectives and received a positive response, allowing us to move forward with pilot programs with convenience stores in Japan. We have posted the presentation from METI, the Ministry of Economy, Trade and Industry. From 2017, describing the program in the resources section of our website for your convenience.

It’s noted in the presentation that the mandate is conditioned on industry reducing the cost of tags, including the chip, antenna and seals to less than $0.01 and developing systems that allow manufacturers to accomplish stores tagging for nearly all products. The government knows that there are many products in convenient stores with special disqualifying conditions such as products worn by microwave, storing medical containers, frozen, chilled or ultra pain. We are being allowed to demonstrate our cost-effective in addressing the aims of the mandated. The implementation challenges facing application of RFID to fast-moving consumer goods are daunting, allowing us to showcase our platform in competitive context.

You may have seen the announcement recently by the strategic partnership formed between Microsoft and Walmart to accelerate Walmart’s digital transformation. We have publicly announced partnerships with each of these companies. We hope that their collaboration will facilitate delivery of applications on our platform at scale benefiting both companies. Integration of our discovery software into Windows 10 core was a technical proof of the feasibility of Digimarc's role in the evolution of mobile device discovery functions. Microsoft's mobile focuses on enterprise solutions, where discovery is a dominant application of the imaging interface.

On the other hand, images in the first generation of smartphones focus on taking pictures. As auto ID proliferates in the age in Internet of Things, we see auto ID as a natural basic feature of smartphone cameras. With the windows technical proof in market, we will support Microsoft's enterprise market and simultaneously, increase our advocacy for this evolution of smartphone camera functionality.

Making identification of objects with interest of a routine function of smartphone cameras is a critical step in addressing the widespread knowing desire of consumer product companies for continuous, mutually valuable engagement with their customers and prospects. The answer to the common question of, “What's the app?” is on the horizon and Digimarc to play a key role in the portfolio of recognition agents empowering this major change in the definition of the smartphone camera.

We have put in place, basic building blocks with industry leaders and their suppliers in the U.S., Germany and Japan. Most of our resources are focused on U.S. retailers or the CPGs. Our priorities for the second half of 2018 are to grow bookings and publicize the evidence of progress among early adopters, collaboration with leaders and industry momentum. The operational foundation of these accomplishments will flow from increasing the effective account management and delivery system, whereby more media are enhanced, more devices are enabled for discovery, more applications are developed and implemented, all of which will deliver increasing ROI to our customers by bringing to bear the benefits of digital technology, providing evidence for rest of the industry and it's time to get on-board.

I understand from analyst that some shareholders and prospects would like more guidance concerning competition we might face, given the long gestation of the market. Our primary competition is the status quo, conventional barcodes. We sell and confront any other competition in the accounts. We view most alternative means of objects identification is complimentary with preferences depending on relevant applications, cost and environmental factors.

For example, Amazon Go has garnered a lot of attention in the capital markets. It combines pressure sensitive shelving, image recognition, account registration and artificial intelligence to allow customers to skip checkout altogether. The Amazon has three stores in operation as announced plans to open a few more. There are small format convenience stores. Some apartment buildings use similar approaches to allow residents to purchase staples like toilet paper and diapers. Cost of implementation of Amazon Go is unknown and certainly high, so its total acceptance is also unknown, registration is required. There is no public information about error rates. Thus, there are many unanswered questions about cost effectiveness, scaling and consumer acceptance.

As I would also assume based on image recognition, the identification can be more reliable and efficient within our data structures like barcodes, QR codes or Digimarc Barcodes that can be used by the computer interface to avoid the need for guessing. Although, the visible data carries may eventually become obsolete, it’s most likely going to be due to Digimarc Barcode, which would make the identification more effective with little marginal cost. Image recognition systems will continue to improve Digimarc Barcode will be a contributor to that improvement.

Regarding the discovered layer of the Intuitive computing platform, we know the recently extended the Swiss mobile scanning software company secured $30 million in Series B financing, leading one of our shareholders to acquire Scandid, there is a competitor that is getting attraction. Their innovations relate to light footprint software for enterprise barcode scanning applications for mobile devices. They have not developed any proprietary data carriers that would compete with Digimarc Barcode, quite the contrary, we publicly demonstrate the technical collaboration that NRF 2017, where they demonstrated Digimarc Barcode detection integrated into their software that their potential application developer for a platform.

The relationship is not progressive with them, because we’ve not found a common customer for such collaboration. Although Scandid describes their businesses offering enterprise mobility in a data capture platform built on proprietary, computer vision, machine learning, augmented reality, thus far, they focused on building application, now it’s scanning just one standard barcodes. We have a shared vision of the future and the core to our relationship. I would welcome the opportunity to together facilitating the seamless multi-model discovery that we both anticipate will be at the foundation the future of auto ID.

Now, application developers like Scandid play a key role in our company’s Intuitive computing platform. We want to foster a large community of such developers. Our vision for media object identification is that non-human discernible visible data carriers that dominate the supply chain today will be obsolete by Digimarc Barcode and chip-based technologies in the context of improving image and audio estimation techniques. Various addition of identity will be blended together to provide users with the seamless multi-mobile discovery capability that will permeate business and society as the Internet of Things becomes more prevalent.

The structure of design and media objects will change to improve auto identification to meet the associated expectations embodied in augmented reality and enterprise automation. We are more than 1,000 patents covering our contributions through this vision that is becoming a reality. Our mission is to build from the top down in our initial product market focus on retailers and the suppliers to grow revenues and profits and demonstrate the more general relevance of our platform.

Our balance sheets are in good shape. We’re very focused on improving operational effectiveness, developing and refining our tools and processes; expanding our institutional knowledge; and supporting our growing supplier network. We plan to present the Liolios Group Gateway Conference in San Francisco on Thursday September 6. In the meantime and until the next quarterly call, investors can follow progress via our many public communication channels, including our social media channels that are accessible via our website presentation of industry events, the Digimarc Perceptions blog and Digimarc Digest, our monthly newsletter. We will update and refresh our website on a regular basis with new content and product information.

That’s it for the prepared remarks for today. Now we’ll open the call to questions.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Our first question comes from Rob Stone. Please proceed.

Rob Stone

Couple of things, Bruce. One is, if I’m remembering correctly from the last call, I think there were two or three pilots going on with thermal labels and I was just wondering, you mentioned thermal labels in context of comments about a couple of customers just for what is the status of going from pilots to implementation on thermal.

Bruce Davis

Yes. So without getting specific about accounts we have full deployment in some stores one of the smaller retailers. And we are anticipating moving beyond pilot with larger retailers. And so far, at [indiscernible], we are working fine. It takes some time to get the printers all enabled for firmware because there are wide range of printers and versions of printers and stores. And so we’ve been sorting out that process since the last call.

Rob Stone

Okay. I think you were also planning once Wegmans was step-up with thermal labels and had more of their planned rollout of packaged sewer branded items in the store on shelves to do a third party test which would help you validate the concept for other potential customers. Any comment on how that might be progressing?

Bruce Davis

Yes. We were planning to do some ROI studies soon. But I don’t have permission, in order to –can I provide any sort of assurance that will be any public disclosure of the results. So we’re doing the test for us and for them. And obviously, for us to make any public disclosures, we would need their permission. And the balance of incentives and business incentives for them to make the disclosure and since that I can’t predict the outcome. So it’s really up to them whether they wanted same thing or not.

Rob Stone

All right. A final question and I’ll jump back in the queue. So you mentioned that you had one large CPG that’s under contract and you’re talking to others and sounds like, in collaboration with or maybe at the behest of one of the large retailer customers, you’re getting more CPG products enabled this year. And I – the first thing was I didn’t quite catch the sequence and the scale, if you could repeat that.

But the heart of my question really is, from what angle if you’re able to provide any more color is the retailer and the CPG partners, are they approaching this? Is it something like we want you guys to do this and we’re going to save money and check out but will help you with engagement or will give you an in cap or sort of a handful of CPG products. I’m just curious about what the use cases? Why the retailers wanting to collaborate with them at this stage?

Bruce Davis

Yes, complicated question. I’ll give you – I’ll do my best to give you a little bit answer to Rob. So we announced previously that we have a multiyear contract with a large CPG. And that I mentioned in this call that we’re negotiating with another one for a similar kind of arrangement. And then, we have a growing number of CPG’s who are doing business with us on a more ad hoc basis, that is that they’re not yet negotiating multiyear large agreements in terms of scope.

So beginning first with where we have contract, the interest there ranges from improving their manufacturing processes to consumer engagement. And we have under CPG’s are interested in the same portfolio of applications. Those that are focusing on retailer relations right now are looking for opportunities to begin to demonstrate merchandising capabilities, improve the consumer experiences and easier check out at retail, so that was slightly different portfolio of applications.

With respect to the – those who are interested in consumer engagement, one of the reasons that I mentioned increasing our efforts to move the smartphone market forward is that the industry has been signing by the lack of the application that they are willing to support for interaction with their customers and prospects, no one yet has cracked the nut on that. So it’s not really a question about Digimarc Barcode is a data carrier, it’s really a question about how the industry is able to engage with their consumers are all having to be this disintermediated by someone like Amazon or Google or even Walmart.

All right, so they like to be able to communicate directly if they can in those circumstances. That opportunity will only arise, I believe, based on all the observations over the last several years, when auto identification is a routine feature of smartphones. So I think, they needed desperately and we’re going to be more vocal and more helpful in trying to get the smartphone guys to move there more quickly. So that’s how all those things come in together. So as everyone on the call, I think – that the independent product suppliers participation in the program brings incremental benefits to the retailers.

So if the retailers is good for them when their suppliers get involved because suppliers see lots of opportunities for benefits from the platform. In addition to making their retail trading partners happy. And so we see a range here participation across the number of applications all of which are consistent with our strategy.

Rob Stone

So is it possible for security around this concept of consumer engagement and merchandising? That that might result in making these activities a little more visible? If a big CPG in a major retailer doing some kind of a program, to try and stir up consumer excitement about this stuff and using the application I would think they have to promote that, so the consumers would be aware of that? Am I barking of the wrong tree or not?

Bruce Davis

No, no, no. You’re spot on to, I’ll call, my ambition. I wish I could say, I know I can deliver, but earlier in the year, I said that those a year in which without necessarily the formality of press release that things become more obvious. I feel really about there is a reasonable chance that’s going to occur and it would be along the lines of what you just outlined. No matter is that, some of this stuff is inherently public. And so as these activities percolate up, what’s going on will become more obvious to everyone.

And then of course, whatever I can, where I sense that there is a need to level of playing field, I’ll amplify the public disclosures and communication vehicles at quarterly call. But there’s a lot of stuff going on. I just can’t – I’m not allowed to talk about, because of the confidentiality restrictions I have on my disclosures, but that will all go away once things get into the public view.

Rob Stone

That’s great. I’ll yield before to the next person in the queue.

Bruce Davis

Thank you, Rob.

Operator

Your next question comes from Marc Weisenburger.

Marc Weisenburger

Thank you very much. You mentioned that there are some handouts in terms of the supply chain and logistics. Can you talk about some of the specifics that are roadblocks? And how you are working with the different parties to expedite the process?

Bruce Davis

I think you may have misinterpreted something I’ve said. I don’t think I’ve said something about hangouts with logistics more that there are opportunities emerging logistics.

Marc Weisenburger

Sure. Can you talk about how you’re helping to facilitate those opportunities along the – that supply chain then?

Bruce Davis

Yes. Yes, so we’ve been asked by some entities to take a look at how we might be able to help out and we’ll just fix it. So beginning with the shipping aspects of logistics, there is a quite high non-read, miss read rate at the receiving facilities of all shippers. And we actually went to a few places and talked to a few folks. And I won’t share anybody’s numbers, but the numbers were quite startlingly high across the number of different shipping channels. And that’s because the labels tend to get misapplied or damaged in shipment.

And so that then leads to a human intervention, a sidetracking of the processing of the packages that move at extremely high speeds, well, when the labels are usually read. So it’s pretty clear towards that we can make the labels more reliably and more efficiently read. There are a lot of open questions about how this is supply and logistics, and so I don’t want to take time on this call to go into that, because this is not core to our strategy right now. But we are being asked to look into it and we are willing to looking to look into it if we are paid to do so.

So we’re being quite clear that we’re not going to get distracted from our core strategy by opportunities there. But it will help us to grow revenues sooner instead later than we’d be happy to talk. So we’ve done initial studies. We understand the situation. We believe we can help and now we need to find sponsors. So we’ll see how that goes.

There’s also an ambition overtime to reduce or eliminate labels consistent with sort of vision piece we did at and around 2018. And that’s a much larger proposition that involves substantial amount of business process reengineering for shipping companies. And so that would be along sort of process. Again, we think that, that can happen and we’d love to contribute to it, but we’re not going to invest in the near-term. All of the work in shipping in distribution centers, eventuates in shipment stores and to the stocking of product on stores.

And so I’ve mentioned a few times now that we intend to work on shelf labels. And one of the primary applications on shelf label improvement is to improve the quality and the efficiency of stock in shelves and making sure that there is adequate product, that the right product is there and the prices are correct. And I think that’s very important, very valuable use of the platform. So we can see now that we’re knitting together, that we’re doing with customers, all the way from the label production associated with building a product to shipping the product to receiving the product to merchandising the product and hopefully, at some point, we’ll get the demonstrate the benefits of home for the consumer. And then we’ve been asked to be involved in recycling, I’ve turned that down.

Again, our desire to maintain focus in relation to the responsible working capital management. So we do think we’re going to be able to demonstrate in not too distant future as soon there is economic sponsorship for all of it. A full lifecycle benefit of the platform for all the products. From actual inception and manufacturing to recycling.

Marc Weisenburger

Great, Thank you. You also mentioned about the network effects of across the platforms and you’re wanting to kind of foster the community of developers. Can you elaborate on that?

Bruce Davis

Yes. We’ve been building some initial applications to prime the pump, that’s – our business model is to focus our energy on improving Digimarc Barcode. And so we’ve build Digimarc Discover so that we have the software that would identify the enhanced media. We’re happy to license that to anybody who wants to use it. And then, the conjunction of the enhanced media the discovery software creates opportunity for applications. We have not commented that we would be a substantial application developer, we want to build the community to do that. So that we can remain focused on the core R&D of replacing conventional data carriers with Digimarc Barcode and receiving lots of income from the application developers on the clients for these platforms.

So it’s really – it’s most akin to an operating system model. And if you think back on the evolution of PC operating systems, you’d see an analogous experience where the operating system companies built a few of the early applications in order to prime the pump. So we’re following a path that’s quite similar to that.

Marc Weisenburger

Great. And one final one from me. Are you seeing any interest for – in categories that you wouldn’t expect beyond kind of the private label stuff that maybe is kind of coming up and could be the next interesting opportunity to expand the platform?

Charles Beck

Nothing that we wouldn’t expect because we expect broad relevance of the platform, but lots of things that could distract us if we let them, but we won’t. So we are very focused on highest and best use of our working capital to address the strategy that we told you all, that we we’re focused on. So we’re going to do something we would do with the capital that we’ve raised from the financial markets. And then, later on, when we have demonstrated success in that target product market, there is a wide ranging opportunity beyond that.

Marc Weisenburger

Understood. Thank you.

Charles Beck

Yes.

Operator

Your next question comes from Ilya Grozovsky.

Ilya Grozovsky

Thanks. It’s Ilya. Wanted to just ask you guys about the margin in the subscription business. Just kind of how do you see that going forward? It’s been balanced around for the last six quarters or so?

Bruce Davis

Yes. We expect long-term that the margin of subscription business would be quite significant. Right now, we kind of have a mix of Guardian revenue and Barcode revenue. And the Guardian revenue is a 50% to 60% margin type business as the concentration of that’s higher obviously there are some implications in our margins. Barcode business really the license component of its basically 100% margin. What can impact margins there though it is that we do provide some services and those services are generally hidden kind of mid-50% margins. So it really comes down to mix of those components. But at Barcode license revenue becomes a much larger component of that line item we would expect that margins would start to rise quite nicely.

Ilya Grozovsky

Okay, thank you.

Operator

Your next question comes from Jeff Bernstein.

Jeff Bernstein

Hey Bruce, just was looking for a little bit more detail about the improved smartphone experience and sort of what needs to happen to get there? Are we talking about basically having the auto ID without pushing the button to take a picture? And that sounds like kind of an operating system of a phone issue. And so is it Android and iOS that have to be targeted or – just going into that a little bit.

Bruce Davis

Sure. So I’ll put together a few threads here, Jeff. The first is, in talking to our CPG customers, they all desperately want consumer engagement, they can’t figure out how to do it. And that’s one of the key value propositions for them of having enhanced auto identification capability and the pack design itself. So we all wanted to happen and one of the benefits of the Microsoft partnership is that we’ve shown as a technical matter that we can be embedded deep within the operating system of mobile devices.

The Microsoft implementation is at a stage where it’s meant to facilitate developer work. So it’s not surfaced as an auto ID feature as a routine function or even those enterprise mobile devices to date. So we would like to move Microsoft to that. But having demonstrated our capability to do such things, we like iOS and Android to come along in the consumer space. And so I think what we’ve proven is that the only reason that’s not happening is priorities of the development resources of those companies.

And so we're trying our best to full some from advocacy here. And that will give them to move us up in the priorities of their developers. And so you can expect us to become more vocal in the coming months, and more instructive about how to get things done in that regard and hopefully, it will be able to list some significant resources to support our efforts. But as we saw the Apple results this week, cell phones sales are flat and where Apple is making those money is growth and services.

Well, auto ID would get rise to a whole new class of services and make consumers really much happier with their devices and provide get deal of utility to them and to the companies that they want to buy products from. So we're going to really up level that activity to the best of our ability during the remainder of the year to see if we can expedite that technical development for everybody's benefit. And it just seems unnatural that in a world in which the leaders of those companies are talking about augmented reality, that they're not allowing this foundational element of identification to think to be augmented, to be optimized. It just seems like they have to do it. And so I don't know that we have been sufficiently advocating that. So we’re going to do better job as the year moves on here and doing that. And we will see what happens, I can't promise on anything, but we're going to – we’re in the top level of our advocacy.

Jeff Bernstein

Great. And just a quick follow-up. I think, you mentioned a list of sort of expanding media coverage for Digimarc Barcode. And I think you mentioned print catalogs and something about some retail ready packs and could you just explain that the things we haven't talked about extensively before hang tags and thermal labels and shelf tags.

Bruce Davis

Sure. So first with the respect to mention catalogs, I should probably say, our catalogs and circulars, so there are – this goes also to the notion of creating more efficient consumer experience in shopping. But we done a little bit of experimentation in the magazine business as you know there's a continuing use in that field. But the question really once again, about what’s the app? There are hundreds of billions of pages of catalogs and circulars, advertising products produced annually in the U.S. alone. And none of them allow for automatic ordering of any other that they’re selling and so for relatively low cost or any of the sponsors of those activities could add that our identification capability. And so we have some interest that's been expressed in a – make a moving down that path.

I think, it’s a terrific idea and again, natural evolution of our society and economy to go in that direction. The Shelf-edge, shelf labels, as I said, it has great benefit for store operations, but can also be used by consumers as we await the proliferation of Digimarc Barcode and packages themselves. Well, some large from that retailers are promoting, what they call shelf ready packs and that’s a shipper carton that has some proliferations, where the carton is basically opened and put on the shelf. It simples the stocking process and it creates a merchandising vehicle around the products if you like. And so Digimarc enhancing the – those shipping packs, we can have an impact on the supply chain and on just shelf by facilitating auto id. And so that again maybe an on ramp if you like to the individual product identification, because it tends to be a less sensitive, easier process to enhance, because it’s mostly corrugated, flat with four color part work.

So that's how all the things tied to together, it’s just the idea of ICP is the more media enhance to more opportunity it create. And nearly all of the media opportunities are our multiple, that is – you don't get just one application to get a bunch. And so the strategy for any large enterprise to move forward with Digimarc is to focus on getting the media enhanced first. And so we can talk to in the capital markets about packaging and more recently about thermal labels but now here appreciate for retailers in there, product suppliers that they all produce box of media. That could be enhanced that would provide the foundation for lots of useful applications in terms of improving operational efficiency and effectiveness on consumer engagement and satisfaction.

Jeff Bernstein

Understood. Thank you.

Operator

Your next question comes from Kevin Hanrahan.

Kevin Hanrahan

Hi, Bruce. I wonder if you could give us an update on GS1, your partnership with GS1 U.S. and other countries and maybe GS1 global, talk about in terms of your barcode become in a second standards.

Bruce Davis

Sure. Thanks, Kevin. We got relationship with GS1 U.S. and GS1 Germany. And we have respectful initially supportive relationship with GS1 Japan, which is a not of part of the government there. We’ve began some discussions with a few other member organizations of GS1 and then GS1 global and the President of GS1 global are quite familiar with us and also very supportive. So with respect to their role in our strategy, we really strongly support all of their work and their standard of work and we think there is vital to continuing to improve auto identification and across the entire supply chain of all the industries served by auto ID.

With respect to standards and specifications, we’ve begun a lot of detail work on specifications, which we intend to publish in the not to distant future for comment. And those specifications we hope will form the foundation when standards activities are appropriate to expedite the development of corporate standards for the global supply chain. So it’s interesting to answer the question because we just happen to be doing a bunch of work on that getting our specs in place. And where the specs become most important as when we move into various sort of low aero tolerant and some environments like distribution and logistics, as I’ve said, they have a terrible problem with the quality of reads of labels.

We certainly want to help out there, but they have very tight specifications typically in that area of trade. And they would not embrace anyone who just came in and said hey, I want to put a link down on your label, makes life better. So we have to very detailed specs for activities like that. And then, overtime, as Digimarc Barcode moves into other areas of say health and safety, it will become widely important out there, very clear detailed specs.

The purpose of standards and the specifications moves beyond just teaching into compliance and the allocation of legal responsibility. And so we contemplate that that will be emerging overtime here and we want to be ready when it does. So we’re building the specs for all of those reasons, and I think we’re making very good progress.

Kevin Hanrahan

So the publishing you talked about, would it be in the form of a white paper to be coming out in later quarters?

Bruce Davis

We will publish specifications. So just like standards but without any official sort of characterization. So they will be – we have a signal specification that is in drop form and then, we’re building applications specific requirements and guidelines. And they will first go into the trade in a limited distribution and then, after we’ve gotten some feedback there then I presume, we can just publish them because that’s their purpose. So they’re not going to be secret. But we would naturally put them into the public domain before giving an appropriate amount of feedback from the trading partners that we deal with.

Kevin Hanrahan

Okay. Thanks a lot Bruce.

Bruce Davis

Yes. So it will be a while.

Operator

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

Bruce Davis

All righty. Thanks everybody for your support, and we greatly appreciate it. We’re doing the best work we can for you and I think that we’ll continue to make progress. And we know what your desires are and we’re completely focused on where you want us to be focused on. So we look forward to talking to you again soon. Thanks, again, and good luck.

Operator

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