Digimarc's Q3 2025 Earnings Call: Contradictions Emerge on Retailer Revenue, European ARR, Gift Card Growth, and Pricing Strategy

Date of Call: October 30, 2025

Financials Results

• Revenue: $7.6M total revenue, down $1.8M or 19% YOY from $9.4M; Subscription revenue $4.6M (60% of total), down 13% from $5.3M; Service revenue $3.1M, down 27% from $4.2M
• EPS: Net loss per share $0.38, versus $0.50 in Q3 last year; Non-GAAP net loss per share $0.10, versus $0.28 in Q3 last year
• Gross Margin: Subscription gross profit margin 86%, flat YOY; Service gross profit margin 57%, down 4 points from 61% a year ago

Guidance:

• Positive non-GAAP net income expected in Q4 2025.
• Positive free cash flow expected in Q4 2025 despite incremental investments in growth.
• ARR expected to trough in Q4 and reaccelerate into 2026 driven by gift card penetration and digital authentication growth.
• Expect to rebuild cash via operating cash flow through 2026.
• Service gross profit margin expected to typically be in the mid-50s.

Business Commentary:

* Gift Card Solution and Retail Loss Prevention: - Digimarc Corporation announced significant progress in the adoption of its gift card solution, with initial Digimarc-protected cards reaching shelves in August and generating a positive response from major brands like Target, Home Depot, and Nordstrom. - This progress is driven by the industry's hyperfocus on addressing fraud threats and reducing operational inefficiencies, as well as the solution's ability to enhance marketing, merchandising, and giftability of gift cards.

• Financial Metrics and Reorganization Impact:
• Ending ARR for Q3 was $15.8 million, down from $18.7 million in the previous year, primarily due to the lapse of the DRS contract. However, excluding this headwind, ARR grew by $600,000 year-over-year.

• The financial performance was influenced by strategic price aggressiveness on products outside of focus areas and higher customer churn, as well as the benefits of the recent corporate reorganization, including reduced operating expenses and cash usage.

• Digital Authentication Solutions:

• Digimarc chose to be conservative about the contribution of digital authentication to 2025 ARR, but exceeded annual targets in the first half of the year.

• The focus on long-term optimization of this area is driven by the recognition of its potential in addressing the growing trust and authenticity problems in the digital world, with use cases like leak detection, internal compliance, piracy prevention, and royalty monitoring.

• Operating Expenses and Cash Flow:

• Operating expenses in Q3 decreased to $12.8 million, down $4.5 million or 26% from the previous year, with non-GAAP operating expenses down $5.5 million or 39%.

• The significant reduction in costs reflects lower compensation costs due to the reorganization and streamlining efforts, leading to a considerable decrease in free cash flow usage.

• Forward-looking Financial Outlook:

• Despite the impact of a renegotiated retailer contract reducing ARR by $3.1 million in Q4, Digimarc expects ARR to trough in Q4 and reaccelerate into 2026, primarily due to increasing penetration of the gift card solution and growth in digital authentication.
• The company remains on track to deliver positive free cash flow and non-GAAP net income in Q4, despite recent investments to accelerate growth in focus areas.

Sentiment Analysis:

Overall Tone: Positive

• Management emphasized operational progress and cost reductions, noting free cash flow usage fell from $7.3M to $3.1M YOY and stated, "we remain on track to deliver positive free cash flow and positive non-GAAP net income in Q4 of 2025," while highlighting strong early gift-card KPIs and pilot momentum.

Q&A:

• Question from Jeffrey Milton Bernstein (Silverberg Bernstein Capital Management LLC): Just a couple of unrelated questions. One, can you just give an update now on HolyGrail? What's happening there now?
  Response: Belgium pilot is live (flexibles across all of Belgium); conversations underway in Germany; details and slide link provided in the deck.

• Question from Jeffrey Milton Bernstein (Silverberg Bernstein Capital Management LLC): Okay. And so these are still -- Belgium is a full country pilot essentially, right?
  Response: Yes — it's a full-country pilot across flexibles in Belgium.

• Question from Jeffrey Milton Bernstein (Silverberg Bernstein Capital Management LLC): And then you mentioned the impact in Q4 of the retailer contract renegotiation. Does that mean that there's still some revenue there or there's still something going on there or is it just that the contract lapsed and there's the impact in Q4?
  Response: The prior contract was renegotiated/ended and will reduce ARR in Q4, but the company still maintains a relationship and other commercial opportunities with that customer, especially in gift-card loss prevention.

• Question from Jeffrey Milton Bernstein (Silverberg Bernstein Capital Management LLC): Got you. So -- but that prior particular contract is over, not being renewed?
  Response: Correct — that particular contract was renegotiated leading to a large downturn, though other contracts with the customer remain open.

• Question from Jeffrey Milton Bernstein (Silverberg Bernstein Capital Management LLC): ...the California AI-related law that got passed that had some digital watermarking language in it. What, if anything, it means? Or is it sort of really a long-term kind of opportunity?
  Response: AB 853 lacked digital watermarking language; metadata approaches are fragile and insufficient; regulation is unlikely to be a near-term revenue catalyst — Digimarc focuses on opt-in, ROI-driven authenticity solutions rather than counting on regulation to drive sales.

• Question from Vijay Homan (for Jeff Van Rhee, Craig-Hallum Capital Group): You've got the first few retailers using Digimarc-protected cards. Just kind of curious how that's going to ramp? Is that about winning more partners, adding more of their retailers, adding geographies? Just kind of what will be the drivers of that ramp? And what are the steps that are going to take you from A to B?
  Response: Ramp drivers are all of the above: sign more printer partners, light up more retailers, add more brands and geographies, and expand card channels; initial KPI success is driving industry confidence for broader rollout.

• Question from Vijay Homan (for Jeff Van Rhee, Craig-Hallum Capital Group): You made some executive changes to the sales org with Tom Benton leaving. If you could just walk us through some of the go-to-market changes that have come out of that and some of the additional steps you foresee taking?
  Response: No substantive go-to-market changes — the full revenue and marketing teams remain in place and continue executing.

Contradiction Point 1

Retailer Contract and Revenue Impact

It directly impacts expectations regarding revenue from a specific retailer, which can influence company financials and investor expectations.

Does the Q4 impact from the retail contract renegotiation mean revenue remains, or did the contract expire causing the impact? - Jeffrey Milton Bernstein (Silverberg Bernstein Capital Management LLC)

2025Q3: The contract has been renegotiated, leading to a large downturn in revenue. However, there is still a relationship with the retailer, and there are ongoing opportunities, especially in loss prevention and the gift card space. - Riley McCormack(CEO)

Do you have visibility into next year given your 10%-15% decline expectation, and when do you typically get indications about next year's outlook? - Jeffrey Van Rhee (Craig-Hallum Capital Group)

2025Q2: The large top-line decline in the quarter was largely attributable to the loss of a very large retail customer contract, which expired at the end of the first quarter and was not renewed. - Charles Beck(CFO)

Contradiction Point 2

European Customer and ARR Impact

It involves the impact of a European customer on ARR, which is a key metric for assessing the company's growth and financial health.

Can you provide an update on HolyGrail? - Jeffrey Milton Bernstein (Silverberg Bernstein Capital Management LLC)

2025Q3: And so we don't have visibility on if or when they will resubscribe. - Riley McCormack(CEO)

Was the European customer signed in the quarter? Did it impact the reported ARR? - Jeffrey Milton K. Bernstein (Silverberg Bernstein Capital)

2025Q2: Yes, it was effective during Q2 and is included in ARR. - Riley Young McCormack(CEO)

Contradiction Point 3

Gift Card Growth and Market Penetration

It involves differing expectations regarding the market penetration and growth potential of Digimarc's gift card solutions, which are critical for future revenue projections.

What's the current status of HolyGrail? - Jeffrey Milton Bernstein (Silverberg Bernstein Capital Management LLC)

2025Q3: Gift cards are likely to experience strong demand during the holidays, and we're well positioned to capitalize on that. We expect gift cards to be a key component of our growth this quarter. - Riley McCormack(CEO)

What is your outlook for achieving the model's revenue and ARR targets from gift card opportunities in 2025? What feedback has the ecosystem provided regarding the differentiation of your solution compared to historical approaches? - Joshua Reilly (Needham & Company)

2025Q1: We expect gift cards to be a significant driver of our 2025 ARR growth. The industry faces an existential issue with gift card fraud, and we believe our solution is novel and well-received. - Riley McCormack(CEO)

Contradiction Point 4

Focus on Authentication Use Cases and Pricing Strategy

It involves changes in strategic focus and pricing strategy, which could affect revenue projections and competitive positioning.

What does the California AI law (AB 853) mean for the company, if anything, and is it a long-term opportunity? - Jeffrey Milton Bernstein (Silverberg Bernstein Capital Management LLC)

2025Q3: We are focusing on authentication use cases and budgeting conservatively to reach breakeven by Q4 2025. In non-focused areas, we might be more price aggressive to maintain our footprint. - Riley McCormack(CEO)

How will resource allocation shift post-reorg to target large commercial customers? Can the company pursue this opportunity while pivoting the go-to-market strategy? - Joshua Reilly (Needham & Company)

2024Q4: We are still having conversations about this opportunity. We're not willing to commit resources indefinitely, and any new agreement would likely be de-scoped from what was originally imagined, but it could actually result in a higher dollar amount. - Riley McCormack(CEO)