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Digimarc Corporation (DMRC) reported its Q3 2025 earnings, showing a significant EPS beat but a revenue miss. The company posted an EPS of -$0.10, surpassing the forecast of -$0.23 by 56.52%. Revenue reached $7.63 million, falling short of the $8.42 million forecast, a 9.38% miss. The stock saw a modest aftermarket increase of 0.96%, closing at $9.48.
Key Takeaways
- EPS significantly beat expectations, suggesting improved cost management.
- Revenue declined by 19% YoY, missing forecasts.
- Free cash flow usage reduced by 58%, indicating operational efficiency.
- Corporate reorganization and focus on core areas expected to drive future growth.
Company Performance
Digimarc’s Q3 2025 performance showed mixed results. While the company managed to beat EPS expectations significantly, revenue declined by 19% compared to Q3 2024. This decrease in revenue highlights challenges in sales, despite operational improvements and cost management efforts.
Financial Highlights
- Revenue: $7.63 million, down 19% YoY
- Earnings per share: -$0.10, improved from -$0.50 in Q3 2024
- Subscription revenue: $4.6 million, a 13% decrease YoY
- Free cash flow usage: $3.1 million, a 58% reduction YoY
Earnings vs. Forecast
Digimarc’s EPS of -$0.10 beat the forecast of -$0.23 by 56.52%, indicating stronger-than-expected performance on the bottom line. However, revenue of $7.63 million fell short of the $8.42 million forecast by 9.38%, reflecting sales challenges.
Market Reaction
Following the earnings announcement, Digimarc’s stock experienced a slight increase of 0.96% in the aftermarket. The stock’s movement suggests a cautiously optimistic investor sentiment, buoyed by the EPS beat despite the revenue miss.
Outlook & Guidance
Looking ahead, Digimarc expects its Annual Recurring Revenue (ARR) to bottom out in Q4 2025 and re-accelerate in 2026. The company anticipates growth from its gift card solution and digital authentication offerings, aiming to rebuild its cash balance through operating cash flow in 2026.
Executive Commentary
CEO Riley McCormack emphasized the company’s focus on trust, stating, "Trust is fast becoming the only currency that matters." CFO Charles Beck added, "We expect ARR to trough in Q4 and to re-accelerate thereafter into 2026," highlighting future growth expectations.
Risks and Challenges
- Declining revenue and ARR could indicate demand issues.
- Market saturation in core areas like retail loss prevention.
- Macroeconomic pressures potentially affecting consumer spending.
- Execution risks related to new product launches and corporate reorganization.
Q&A
During the Q&A session, analysts inquired about Digimarc’s recycling opportunities in Belgium and ongoing customer relationships. The company also addressed implications of California’s AI law and its go-to-market strategy for the gift card solution.
Full transcript - Digimarc Corporation (DMRC) Q3 2025:
Conference Operator: Greetings and welcome to the Digimarc Corporation Q3 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, George Karamanos. You may begin.
George Karamanos, Investor Relations, Digimarc Corporation: Thank you so much. Welcome, everyone, to our Q3 conference call. Riley McCormack, our CEO, and Charles Beck, our CFO, are with me on the call today. On this call, we’ll provide a business update and discuss Q3 2025 financial results. This will be followed by a question-and-answer forum. We have posted our prepared remarks in the investor relations section of our website and will archive this webcast there. For those of you dialing in, this is a reminder that we are simulcasting a presentation that Riley and Charles will walk through today. If you would like to follow along with a slide, I would encourage you to join our webcast as referenced in our earnings press release shared earlier today. Before we begin, let me remind everyone that today’s discussion contains forward-looking statements that have risks and uncertainties.
Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Riley will now provide a business update.
Riley McCormack, CEO, Digimarc Corporation: Thank you, George, and hello, everyone. On this call, we will walk through Digimarc’s Q3 performance, highlight our strategic progress across product innovation and commercial execution, share updates on our financial metrics such as ARR and cash burn, and provide clarity on where we are focused heading into the last quarter of the year. In Q3, we made significant progress in advancing towards widespread adoption of our gift card solution and closed multiple upsell opportunities in the product authentication space, including our expansion to a sixth country with a global tobacco company. We quickly turned an inbound inquiry from a major pharmaceutical company into a paid pilot for a novel application of our product authentication solution that, depending on pilot results, may have wide applicability not only across other pharmaceutical companies but additional industries as well.
We launched a revolutionary new digitized security label solution to help brands upgrade from analog, easy-to-replicate, and low-value-add holograms. We made significant progress advancing our digital authentication offerings while in parallel growing the pipeline, setting ourselves up to take full advantage of this nascent and exciting market in 2026 and beyond. We also continue to harvest the benefits of our recently completed corporate reorganization. Operationally, it has allowed us to increase our focus on the areas most likely to deliver this scalable and repeatable business we must always focus on delivering. Financially, the reorganization has resulted in a meaningful reduction in operating expenses and cash usage, and we remain on track to deliver positive free cash flow and positive non-GAAP net income in Q4 of 2025, even with our recent decision to invest in more resources to accelerate growth in our focus areas of retail loss prevention and digital authentication.
As has been shared previously, our three focus areas are retail loss prevention, product authentication, and digital authentication. We have several significant ARR generation opportunities in front of us, such as protecting the world’s gift cards that exhibit strong demand pull characteristics with the goal of much quicker time to revenue relative to some of our identification use cases. The decision to focus our time and resources on these three core areas was supported by deep market research, validated by customer feedback, and further confirmed independently by work we commissioned from our consulting partners. With that said, we remain firm believers in our positioning and our ability to execute on the various ecosystem-driven opportunities as they eventually become ripe enough to actively pursue. Our greatest near-term opportunity is retail loss prevention and, more specifically, our gift card solution.
On this front, we made substantial progress in our march towards gaining widespread adoption, aided in large part by the industry’s hyper-focus on finding a solution to the fraud that is creating an existential threat to their business. The global gift card industry is estimated to represent approximately $1 trillion of stored value, having reached this impressive milestone due to the many benefits these cards provide to all stakeholders, most importantly, consumers. Unfortunately, this large market opportunity has not escaped the attention of sophisticated state-sponsored bad actors, and industry growth is currently being negatively impacted by the ever-more advanced attacks targeting this global currency. Digimarc’s 28-year history working with the World Central Bank to protect the vast majority of banknotes in circulation worldwide, combined with our decade-plus experience at retail front of store, ideally positions us to help this industry re-accelerate its growth.
In addition to reducing fraud and the many direct and indirect costs of that fraud being borne by brands, retailers, and consumers, our solution also allows the entire industry to improve the marketing, merchandising, and giftability of gift cards. These three elements were critical pillars of the industry’s historic growth, and all three have been negatively impacted by existing security solutions. Along with fraud reduction, the ability for the industry to reinvest in these three pillars to yet again supercharge sales is becoming another selling point of our solution. Our solution also allows for reduced packaging waste and improved sustainability, a value proposition that is resonating with some iconic global brands and is compliant with the ever-increasing number of regulations being put in place. Most front of mind currently in the U.S. are the Maryland and New Jersey laws.
As more industry participants are exposed to our solution, additional benefits become clear: a wonderful byproduct of being the first adaptable, extensible, and technology-driven security layer in this dynamic industry. We provide a solution that is more secure than the highest security solutions on the market today while allowing the industry to regain the use of the powerful growth tools they’ve had to abandon these past few years. Turning now to the results from our initial rollout, the first Digimarc protected gift cards reached shelves in August. Major brands participating included Target, Home Depot, Nordstrom, and Blackhawk Network multi-retailer cards. The response has been extremely positive, and all KPIs have been easily surpassed. These KPIs include multiple metrics measuring the effectiveness of our solution, plus our impact on the industry’s operational efficiency.
As we’ve shared in the past, one of the most powerful facets of this opportunity is that laggards in the adoption of our gift card solution will bear the compounded cost of an increasing percentage of an ever-increasing amount of fraud. We and our partners believe this positions us for a powerful demand pull dynamic. The detailed results of our initial rollout have been widely shared within the industry, and we expect multiple major retailers to start selling Digimarc protected gift cards within the next two quarters, carrying an expanded number of closed-loop brands as well as initial open-loop cards. As a reminder, closed-loop cards are gift cards that can only be redeemed at specific retailers. Open-loop cards are issued by the credit card companies and can be redeemed at any location where that credit card is accepted.
As a reminder, we intend to predominantly sell our solution to gift card manufacturers who will apply our technology during their normal printing process before delivering the cards as they currently do today. We have built our go-to-market strategy around trying to solve for two often conflicting goals: providing a revolutionary new solution and minimizing impact on the ecosystem’s existing workflow. I think the team has done an incredible job of doing just that. We are currently in commercial discussion with eight gift card manufacturers as well as one additional direct customer. These discussions are being shaped, as they always are, by our desire to be an excellent partner to the industry and thus balance, A, the dynamic that laggards in adoption will bear compounding costs of fraud, and B, the immediacy of a much broader rollout.
Our plan is to ensure we contract for enough 2026 committed annual capacity so we can credibly address burgeoning industry concerns about whether there will be adequate capacity to avoid the potential for involuntary laggards, and then quickly move from commercial discussions to working with our initial partner or partners to flawlessly execute on the expected impending ramp of Digimarc protected gift card production. The timelines to deliver this large ramp are very tight, and therefore our goal is to quickly move to the contracting stage and to only contract with a small subset of these eight printers right now, as we believe with the right partners we can strike the optimal balance between our two goals.
Turning now to our product authentication solutions, we closed multiple upsell deals with existing Digimarc Validate customers, reflecting both increased contract value and the expansion of our solution to new geographies and new brands, including the expansion of our solution to the sixth country of a global tobacco company with operations in approximately 175 more. As we’ve repeatedly stated, when we solve our customers’ most challenging problems, we expect to be an upsell and cross-sell company for a very long time. We also closed a paid pilot with a major pharmaceutical company that approached us with a pressing problem they’ve been unable to solve using other means. I am proud of how quickly and how deeply the team diligenced the problem, allowing them to find a potential solution using existing Validate capabilities.
I am equally as excited for us to successfully execute on the pilot because if we can indeed solve this problem, our solution should be widely applicable across the entire pharma vertical and other verticals as well. Finally, we also launched a revolutionary new digitized security label solution to help brands upgrade from analog, easy-to-replicate, and low-value-add holograms. This label can be authenticated by consumers and field agents with mobile phones and other devices, providing deterministic B2B or B2C authentication with analytics all in one place. Touching now on our digital authentication solutions, as mentioned on our last three calls, we chose to be conservative about this area’s contribution to 2025 ARR.
We made this decision to help ensure we remain focused on optimizing our work in this area for the long term as opposed to making decisions that might lead to short-term revenue but would come at the cost of our ultimate potential scale. Not only did we exceed our annual target in the first six months of the year, as we shared last year, but we are now in a position to harvest the fruits of this decision in 2026 and beyond. The twin catalysts of the relentless advance of AI models and agents and the rapid progression of content credentials have created a wave of awareness and urgency for a robust, scalable, secure, imperceptible, perpetual, and deterministic solution to address the many trust and authenticity problems growing in the digital world. We expect this space to continue its recent noteworthy growth and evolution.
While some of the nascent digital use cases might be served, at least in the interim, with good enough offerings, what has become apparent to us in the last few months is that the aforementioned twin catalysts are opening the market for use cases where good enough just simply will not do. Our technology, our history, our credibility, our expertise, our experience, and our first-to-market-with and co-leadership of the digital watermarking component of the C2PA standard are all coalescing to ensure we are well-positioned to serve this ever-growing wave. We pioneered this space. This is quite literally what we were born to do, and the market is finally here. After deep analysis across three vectors: market demand, our technological differentiation, and buyer synergy, we have narrowed our focus in the digital authentication space to four use cases: multiple flavors of leak detection, internal compliance, piracy prevention, and royalty monitoring.
Our pipelines of both opportunities and partners are growing prior to widespread marketing efforts, and we are now resourcing this area with the expectation it’ll be a significant contributor to our 2026 growth and beyond. We are confident in the opportunities provided in our three key focus areas and are excited by the results our increased focus are already beginning to deliver. Ecosystem-based sales are great because of their size, but the sales cycles can be slow, expensive, and multiple constituencies must adopt before meaningful ROI is unlocked. Our strategic shift allows for the building of a scalable and repeatable business where we can fail fast, iterate, and win often, and allow these massive but not yet quite ripe-for-the-picking opportunities to provide the potential for another layer of tomorrow’s growth. I will now turn the call over to Charles to discuss our financial results. Thank you, Riley, and hello, everyone.
Ending ARR for Q3 was $15.8 million compared to $18.7 million for Q3 last year. The decrease reflects $3.5 million from the DRS contract that lapsed in Q2 this year. Excluding this headwind, ARR grew $600,000 year-over-year. That growth, however, was largely muted by higher other customer churn and our choosing to be strategically price-aggressive on products outside of our focus areas. As I’ve stated previously, we expected these impacts as we sharpened our go-to-market focus. We believe the churn is now largely behind us except for the renegotiation of the retailer contract we mentioned last quarter, which will reduce ARR by $3.1 million in the fourth quarter. Despite this headwind, we expect ARR to trough in Q4 and to re-accelerate thereafter into 2026, largely from increasing penetration of our gift card solution and growth in digital authentication.
Total revenue was $7.6 million, a decrease of $1.8 million, or 19%, from $9.4 million in Q3 last year. Subscription revenue, which accounted for 60% of total revenue for the quarter, decreased 13% from $5.3 million to $4.6 million. The decrease largely reflects the impact of the expired DRS contract I referenced on the prior slide. Service revenue decreased 27% from $4.2 million to $3.1 million, reflecting lower government service revenue from the central banks, as expected given the lower 2025 program budget we’ve discussed on prior earnings calls, and no revenue from Holy Grail recycling products in Q3 of this year as those projects concluded earlier this year. Subscription gross profit margin was 86% for the quarter, flat with Q3 last year.
On the last earnings call, I shared that we expected to see a downward blip in our subscription margins for anticipated costs we would incur to migrate our customers from legacy platforms to Digimarc Illuminate. Due to some incredible work from our team, we actually saw an immediate reduction in our costs, with subscription costs decreasing 13% year-over-year. We expect to generate additional savings as we continue our work. Service gross profit margin was 57% for the quarter, down 4 points from 61% in Q3 last year. The decrease was due to a more favorable mix of revenue and cost last year. As a reminder, we expect service gross profit margin to typically be in the mid-50%. Operating expenses were $12.8 million for the quarter, down $4.5 million, or 26%, from $17.3 million in Q3 last year.
The large reduction in costs reflects lower compensation costs due to the reorganization in Q1 this year and lower other cash costs from our streamlining efforts. We still expect even more cost savings in Q4 from our streamlining efforts as not all the benefits were fully realized in Q3. Non-GAAP expenses, which exclude non-cash and non-recurring items, were $8.6 million for the quarter, down $5.5 million, or 39%, from $14.1 million in Q3 last year. Again, the decrease is due to the impact of the reorganization and streamlining efforts. Net loss per share for the quarter was $0.38 versus $0.50 in Q3 last year. Non-GAAP net loss per share for the quarter was $0.10 versus $0.28 in Q3 last year.
We remain on track to generate positive non-GAAP net income in Q4, even with our recent decision to invest in more resources to accelerate growth in our focus areas of retail loss prevention and digital authentication. Regarding cash flow, we ended the quarter with $12.6 million in cash and short-term investments. Free cash flow usage was down considerably from $7.3 million in Q3 last year to $3.1 million in Q3 this year, a decrease of $4.2 million, or 58%. The decrease largely reflects a significant reduction in our total expenses. Looking forward, we remain on track to deliver positive free cash flow in Q4 despite our recent decision to invest in more resources to accelerate growth in our focus areas, again, of retail loss prevention and digital authentication. Looking further ahead, we expect to rebuild our cash balance via operating cash flow throughout 2026.
For further discussion of our financial results and risk and prospects for our business, please see our Form 10-Q that will be filed with the SEC. I’ll now turn the call back over to Riley for final remarks. Thank you, Charles. In the wake of the relentless acceleration of AI models and agents, a vacuum of trust and authenticity is being created. Trust is fast becoming the only currency that matters, and the future will belong to companies that make that currency scalable. We believe Digimarc is ideally positioned to lead that charge. We are focused on delivering a future where humans and intelligent systems alike can verify what’s real, protect what matters, and move forward with confidence. We are focused on filling the ever-expanding vacuum by positioning ourselves to deliver trust in every interaction, spanning both the physical and digital worlds.
We are building the trust layer for the modern world, a layer that is needed now more than ever and is forming a massive opportunity we were created to deliver. Operator will now open the call for questions. Thank you. We will now be conducting a question-and-answer session. If you’d like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment while we pull for questions. Our first question comes from the line of Jeffrey Milton K. Bernstein with Silverberg Bernstein Capital Management LLC. Please go ahead. Hey, guys. Just a couple of unrelated questions.
One, can you just give an update now on Holy Grail. What’s happening there now? Yeah. Jeff, it’s in our slide. We give an update on what we’re doing, and not just Holy Grail, right, across all recycling opportunities. As we announced a couple of quarters ago, Belgium is getting going. There are conversations in Germany. Actually, we included a link in our deck you can click on for more details on both of these. Okay. These are still Belgium is a full-country pilot, essentially, right? Yeah. Jeff, if you go to the website, you can see all of this. It’s on flexibles, but yes, it’s across all of Belgium. Yeah. Gotcha. Okay. All right. You mentioned the impact in Q4 of the retailer contract renegotiation. Does that mean that there’s still some revenue there?
There’s still something going on there, or is it just that the contract lapsed and there’s the impact in Q4? Yeah. We still have a relationship. They’re still a valued customer. We’re not going to talk about any customers by name or details, but I would point you, Jeff, to what I shared in the last call, my prepared remarks, and an update Charles provided today. They’re absolutely still a customer and have wonderful opportunities with them across loss prevention, specifically in the gift card space. Gotcha. That prior particular contract is over, not being renewed, correct? We have a contract renegotiated that led to a large downsell, yes, but we still have other contracts open with them, Jeff. Right. Understand. No, that’s perfect.
I’m interested in your thoughts around the, I guess it was AB 853 in the final version or whatever, the California AI-related law that got passed that had some digital watermarking language in it. What, if anything, does it mean, or is it really a long-term kind of opportunity? Yeah. Unfortunately, this one did not have digital watermarking language in it. They talked about a couple of requirements that might play on this space. Our belief is a couple of things, and this hasn’t changed. First of all, there is not a single system of trust and authenticity in the world that is based on, I guess, fakes or synthetic content being marked as such, right? It’s always an opt-in because that’s where the value comes if it is removed.
Our belief has always been that, yes, it might be important to label certain things as AI-generated, but really what’s important is giving human beings the ability to optionally, so not by mandate, with respect to privacy laws, to mark their items as authentic. That’s how systems of trust and authenticity work. Without having a permanent tether, what this law is talking about is metadata. Metadata right now, until the internet is completely re-architected, which I don’t think is going to happen in the next couple of hundred years, is stripped out. Excited to see governments take action in terms of a step in the right direction. Our belief is this doesn’t go anywhere near far enough. The previous bill from last year would have addressed all of these concerns, and we’ll see how this plays out.
I would also point you to, Jeff, when we talk about our digital space, you’ll notice that provenance and authenticity is not necessarily an area we’re focused on right now. That’s for a couple of reasons. This might be an area where. Good enough for the time being is good enough. More importantly, regulations are not quick catalysts for revenue. Even when a regulation were to take place, and we’ve seen this in your first question about recycling, right? PPWR passed a couple of years ago. It still takes the time. We’re not looking for regulation to drive business. I think regulation is a nice sort of cleanup, maybe to get the last 10% or 20% of a market.
We’re focused on selling things that actually people are really interested to purchase themselves because of an immediate ROI, not because some government says something, because some other government’s going to say something else. Yep. Yep. Understand. Okay. That’s great. Thanks. Thanks, Jeff. Once again, if you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you’d like to remove your question from the queue. One moment while we pull for questions. Your next question comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group LLC. Please go ahead. Hi there. This is Vijay Hoen on for Jeff Van Rhee. Just kind of a quick one. You’ve got the first-year 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? What will be the drivers of that ramp, and what are the steps that are going to take you from A to B? Yeah. Great question. It answers all of the above, right? Our focus and the industry and our partners’ focus is on lighting up more and more retailers, lighting up more and more brands for those cards to flow through those retailers, both in the U.S. and other countries in North America and countries around the globe, and also cards that aren’t necessarily sold through these existing channels today. The answer is all of the above. What we’ve talked about with our initial rollout was the results, and that’s giving the industry the confidence to take this in a broader direction across multiple different vectors. Okay. Got it. Thanks. Just one more.
You made some executive changes to Salesorg, obviously, 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. Thanks. Yeah. I’m not sure what you’re saying in terms of what’s the go-to-market. Can you ask the question maybe more directly, what you’re trying to get at? No, I was just curious if there’s any updates there, just anything kind of that’s changed. None of the personnel is different. No, nothing’s changed. We still have the full rev team and marketing team moving forward with their jobs. All right, thank you. There are no further questions at this time. This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines and have a wonderful day.
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