Cracking The Code On DigiMarc (DMRC): Deteriorating Business Will Continue To Decline - Part 2

by Sonya Colberg, Senior Editor - 6/4/2015 9:39:53 AM

Barcode technology company Digimarc faces even more challenges beyond those detailed in TheStreetSweeper’s part 1. So, in this part 2, let's look at those risks:

*Digimarc’s Discover remains undiscovered

Digimarc hopes it can advance its Digimarc Discover – designed to combine “invisible” barcode technology and media experiences - sufficiently to fill in the gaps left by declining revenue from major customers such as Intellectual Ventures, whose license payments have ended and consulting fees will end this year. But that appears unlikely.

Why? There are three major reasons.

*Negative reviews

*First, most reviewers seem to have had problems with the quality of Digimarc Discover.

In fact, most of the 986 Appszoom reviews of the product were negative, giving Discover a measly ranking of 1 ½ stars:


(Source: AppsZoom)

Meanwhile, the majority of reviewers gave the product 1 star out of 5 stars at play.google.com, though it did make a total of 2.9 stars.  

Photographer, webmaster and gear reviewer Ken Rockwell is not impressed with Digimarc Discover, either. He said the product degrades images, requires larger compressed JPEG files, is not invisible and offers many disadvantages.

*Turning the pack

Second, groups such as product manufacturers, scanner makers, package printers and retailers have to be convinced to switch from their current barcode.

Manufacturers would face additional costs to switch to a different barcode. Retailers who would like to use the Digimarc barcode would face the costly, time-consuming effort of adding camera capabilities to all scanners, as well as expensive fees.

This chart breaks down the cost of Digimarc’s $350 setup fee per code and $50 per year maintenance fee with the UPC barcode costs:

 

# of items needing UPC barcode

Initial fee $

Yearly  fee $

Total $

# of items needing DigiMarc barcode

Initial fee $

Yearly fee $

Total $

1-10

250

50

300

1-10

350

50

400

1-100

750

150

900

1-100

3,500

50

3,550

1-1,000

2,500

500

3,000

1-1000

350,000

50

350,050

Up to 10,000

6,500

1,300

7,800

1-10,000

3,500,000

50

3,500,050

Up to 100,000

10,500

2,100

12,600

Up to 100,000

35,000,000

 50

35,000,050

(Sources: Seeking Alpha, GS1 US)

So, understandably, retailers would balk at plunking down as much as 3,000 times more for Digimarc’s barcode than for the current low-cost, perfectly capable barcode.

*Walmart failure offers sad model

Third, Walmart’s infamous barcode replacement attempt serves as a model of disappointment.

Bullish posters on message boards and a Seeking Alpha author have insinuated that Walmart is on board with Digimarc or may someday sign on and “flex its muscles and insist that all of its products carry the code.”

But they’ve unintentionally pointed to one of the best arguments against widespread adoption of Digimarc bar code: Walmart caved in a long-term attempt to change the barcode system.

Walmart pushed RFID or radio frequency identification chips into its supply chain in 2003. Walmart’s then-CIO Linda Dillman issued a mandate to top suppliers, requiring RFID tags on all cases and pallets within 18 months. The remaining suppliers were expected to fall in step before 2006 ended. (Walmart and Dillman, now QVC’s CIO, have not responded to TheStreetSweeper’s requests for comment.)

Walmart’s announcement set RFID on fire. Forrester Research ripped out a report titled “Wal-Mart’s RFID Endorsement: The Tipping Point,” according to ZD Net’s article, “Did Wal-Mart Love RFID to Death?”

Pete Abell, then an analyst with AMR Research, told another tech site, CNet, “I imagine there will be a rush on investing in RFID.” He predicted spending could be “bigger … than Y2K.”

Walmart abandoned RFID barcode in 2009.

Widespread adoption didn’t happen. Walmart’s RFID has been relegated to some inventory control, and RFID manufacturers and investors alike lost money.

“They saw all this hype and poured in a lot of money,” Marc Roberti, editor of RFID Journal, told ZD Net. “A lot of these companies burned.”

*Conclusion:

Along with the nervy executive enrichment and insider selling amid a crumbling customer base and declining financials, Digimarc is trying to turn the pack toward its very expensive, negatively reviewed solution. Mix in declining gross margins and Walmart’s own abysmal RFID barcode failure.

Then, toss in the most recent quarter’s declines highlighted in this chart.

DigiMarc

1Q 2015

1Q2014

% Change

Revenue

$5.99 m

$7.21 m

 16.9%

Cost of Revenue

$2.42 m

$2.15 m

  12.6%

Net Loss

$-4.15m

$-1.99m

 108.5%

Shareholder Loss

$-0.52 per share

$-0.29 per share

   79.3%

 

(Source: SEC filings)

And note the precipitous gross margin decline – from the 70s and 80s down to the 60s of recent quarters:

Q ended

Gross profit %

 

Gross profit %

March 2015

60

March 2014

70

Dec. 2014

62

Dec.  2013

71

Sept. 2014

69

Sept. 2013

74

June 2014

66

June  2013

80

(Sources: SEC filings, here, here)

Additionally, Digimarc has only $5 million in cash  - plus $32 million in marketable securities - and persists in burning over $2 million quarterly. The company’s $100 million shelf registration has tens of millions worth of stock available to sell. They’re going to have to knock down that shelf and dilute shares before too long.

The stock has screamed upward about 30 percent in three months to over $29. Now, we believe it’s on the verge of hitting reality at about $17 per share … probably eventually dropping in half again.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in DMRC and stand to profit on any future declines in the stock price. 

Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to editor@thestreetsweeper.org or scolberg@thestreetsweeper.org.

Share





For Previous Stories Click Here!


| More