Ladies and gentlemen, greetings, and welcome to the Digimarc Corporation Q2 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, George Karamanos. Please go ahead.

Thank you very much. Welcome, everyone, to our Q2 conference call. Riley McCormack, our CEO; and Charles Beck, our CFO, are with me on the call. On the call today, we will provide a business update and discuss Q2 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, we have changed the format of our prepared remarks and we'll be simulcasting a presentation that Riley and Charles will walk through today. If you would like to follow along with the slides, 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.

Thank you, George, and hello, everyone. On this call, we will walk through Digimarc's Q2 performance, highlight our strategic progress across product innovation and commercial execution, including the pending launch of our gift card solution, share updates on our financial metrics such as ARR and cash burn and provide clarity on where we are focused heading into the second half of the year. In Q2, we made significant progress towards launching our gift card solution, generated new ARR from a European packaging customer for a multiyear committed contract that should generate near 7 figures next year and had several upsell ARR wins with existing customers. We delivered our next-generation audio digital watermark to enable accurate compensation for creators and safeguard sensitive data. And we were recognized in Gartner’s Hype Cycle as a key vendor in the emerging TrustOps category alongside the likes of Microsoft and Google and aligned with McKinsey’s identification of digital trust as one of the top technology trends shaping the future. We also completed our corporate reorganization in the second quarter and are seeing significant benefits across the organization as a result. 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 by Q4 2025. Operationally, it has allowed us to increase our focus on the areas most likely to deliver the scalable and repeatable business we must always focus on delivering. I would like to thank all of my teammates for their hard work in effecting this important step in our continued evolution. While not an easy process, we are seeing positive results in our ability to execute on our business. As has been shared previously, our 3 focus areas are retail loss prevention, product authentication and digital authentication. We…

Thank you, Riley, and hello, everyone. Ending ARR for Q2 was $15.9 million compared to $23.9 million for Q2 last year. The decrease reflects both the $5.8 million retailer contract that lapsed last year and $3.5 million from the DRS contract that lapsed in Q2 this year. Excluding these 2 headwinds, ending ARR grew $1.3 million 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, both of which had outsized impacts in the first half of 2025. As I stated on the last earnings call, we expected these impacts as we sharpened our go-to-market focus, and it is important to note that our ending ARR is in line with our original 2025 internal budget. Total revenue was $8 million, a decrease of $2.4 million or 23% from $10.4 million in Q2 last year. Subscription revenue, which accounted for 58% of total revenue for the quarter decreased 28% from $6.4 million to $4.6 million. The decrease reflects the impact of 2 expired contracts I just referenced. Service revenue decreased 15% from $4 million to $3.4 million, reflecting lower government service revenue from the Central Banks. The decrease is generally in line with our expectation of a 12% to 14% decrease in program work for fiscal 2025 that we shared on the previous earnings call. Subscription gross profit margin, excluding amortization expense, was 85% for the quarter, down 4 percentage points from Q2 last year, reflecting the impact of lower subscription revenue. We anticipate that subscription gross profit margins may be lower next quarter as we work to consolidate our legacy platforms. After the migrations are completed, we expect subscription gross margins to not only fully recover but to increase beyond current levels as…

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. I would like to conclude this call by once again thanking my amazing teammates. Reorganizing our business to increase our focus has been extremely challenging, but absolutely necessary to achieve the results we know we must deliver, fast, profitable and durable growth. I believe we are positioned to win and are on the precipice of scalable and repeatable in our commercial business. I'm excited to share our progress, especially in the quarters to come. Operator, we'll now open the call for questions.

[Operator Instructions] Our first question comes from Jeff Van Rhee with Craig-Hallum Capital Group.

Great. So a couple for me. On the -- Charles, you mentioned the run rate expenses have come down. What is the GAAP OpEx run rate at the end of the quarter?

The non-GAAP operating expense run rate?

Yes, GAAP or non-GAAP. At the end of Q2, you said it came down quite a bit. I'm just trying to figure out how far you are...

Yes. For non-GAAP. Yes. So we were at $8.9 million of non-GAAP operating expenses for the quarter. We expect that that's going to continue to come down some as we start to realize the full benefit of all of our streamlining efforts.

And I guess what I was saying is, I know it was $8.9 million for the quarter. Based on the cuts you've made, how much lower than that $8.9 million quarterly rate is your run rate right now?

Yes. I'm not going to give exact guidance, but there's still a significant amount of savings that we can generate in Q3 and Q4.

Yes. Jeff, just to be clear on that, there is more even -- even looking at our current monthly or weekly run rate, there's still more ahead of us from non-headcount savings.

Got it. That's helpful. And then on the Central Bank business, the -- do you have visibility into the forward year this year? I think you had said expect down 10%, 15%. And that's kind of what we've seen. Do they -- I don't know when you get an indication. Just when do you get an idea of what next year looks like there.

Yes, Jeff, we do have usually a full year of visibility. But again, we wouldn't provide guidance unless we expect material changes in our business. So we generally have at least 12 to 18 months of kind of forward-looking visibility because they commit to a [ SOW ] basically a year in advance. So we have fairly good visibility there.

Okay. I mean, historically, it had been kind of flattish. You can't share if it's kind of flattish or it continues this roughly 10% decline?

What I said is if we expected a material difference, and that's something that we would disclose.

The European customer that you mentioned...

You could assume that. Means it's not going to be materially different from 2025.

Okay. The European customer that you mentioned in the quarter, nice ARR value to that. Was that signed in the quarter? And did that impact the reported ARR?

Yes, I was at the close...Sorry, go ahead, Charles.

Yes, I was going to say, yes, it was effective during Q2 and is included in ARR. Although that contract, as Riley referenced, is expected to grow in multiple years. So only the first year is reflected in ARR at this point in time. So there's some potential built-in basically upsell in future years under that contract.

[Operator Instructions] Our next question comes from Jeff Bernstein with Silverberg Bernstein Capital.

Just on the gift card business. You cited a lot of different constituents and sort of supply chain touch points that you had to make to get the first cards in the market. Can you just give us a kind of a top-down on how many card vendors are there for you guys to work with? Do you have to retouch a lot of these points again for each one? Or is a lot of that work done? It sounds like in terms of brands, you actually have -- are touching several brands already that will go into the retailer that you talked about. But just flesh out the mechanics of all that.

I'm not sure I exactly understand the question. Jeff, are you asking how many brands we're working with, how many retailers? Maybe you can repeat the question.

No. I'm asking -- yes, it's what's important? Is it just the gift card companies? And if so, are there 4 and we just got to get 3 more? Do you have to retouch all scanners? Do you have to retouch brands? Do you have to retouch retailers? Or does it all go through 3 gift card guys you have to win? Just give us the whole breakdown of how this all works.

How much time you got? But I'll try to give you a high-level fly-by. Jeff, this is the right question. So we are predominantly going to market through the gift card manufacturers i.e. the printers. That is a relatively concentrated industry. There is tens globally, but a lot more concentrated, think of the 80-20 rule. Those will, for the most part, be our customer. There are going to be 1 or 2 people we're going to go to market with directly. But again, going back to what I said, we -- the team has done an incredible job when you're rolling out a revolutionary new technology, right? And think about the gift card industry. All of their -- this is a massive existential problem that they are facing. They are critically or hyper focused on solving it. And they're currently fighting it using analog technologies. That's what makes us so much different. We're better, we're cheaper. We're also, for the first time, a technology solution, which means we're better today and we're going to have a road map for the next 20 years as long as we continue to join this industry to fight this massive, massive fraud. So -- but when you're rolling out a revolutionary new technology and also trying to not disrupt the existing workflow, that's a really tall task. And I think the team did a really good job in planning the go-to-market strategy, which is why we're going to market through these gift card manufacturers or printers. So that's number one. The gift card printers work with all of the brands. I mean that's obviously how the brands get their markets where their cards created. So they're going to be discussing our new solution with their customers. We're also key in this whole industry, something…

That's what I was looking for. That's fine. We can do more offline, but that was generally what I was...

I'm sure we will.

Ladies and gentlemen, at this time, there are no further questions. The conference of Digimarc Corporation has now concluded. Thank you for your participation. You may now disconnect your lines. Thank you.