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Bitstream Inc (NASDAQ:BITS)

F3Q09 Earnings Call

November 12, 2008 4:30 pm ET

Executives

Anna Chagnon - President and Chief Executive Officer

James Dore - Vice President and Chief Financial Officer

Analysts

Glenn Mattson - GTK Capital Partners LP

George [Gavi] - Western International

Todd Marvel - Raging Capital Management LLC

Operator

Good day, ladies and gentlemen and welcome to the Bitstream earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. (Operator Instruction) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Ms. Anna Chagnon, President and CEO of Bitstream. Ms. Chagnon, you may begin.

Anna Chagnon

Thank you. Hello and welcome to Bitstream Inc third quarter 2008 conference call. I am Anna Chagnon, President and Chief Executive Officer of Bitstream.

James Dore

And I am James Dore, Bitstream's Vice President and Chief Financial Officer.

Anna Chagnon

We will begin this conference call with highlights for the third quarter followed by question-and-answer session. During this conference call, we may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including, without limitation, market acceptance of the Company's products, competition and the timely introduction of new products.

Any forward-looking statements made during this conference call represent the Company's judgment as of today and we caution listeners not to place undue reliance on such statements.

James Dore

In a short time ago, we reported our results for the third quarter of 2008 with the following financial highlights. We generated net income and cash through operations through our 14th consecutive quarter. Revenue decreased $324,000 of 6% to $5.483 million for the quarter ended September 30, 2008 as compared to $5.807 million for the same period last year and $1.035 million or 16% as compared to $6.518 million for the quarter ended June 30, 2008.

Revenue at our current size may vary quarter to quarter due to the timing of license agreements. Our product lines continued to experience cyclicality which may cause fluctuations in our cost of revenue as a percentage of revenue quarter to quarter. Third quarter revenue typically are weakened due to the slow summer months of July and August with affecting the September by global economic concerns and the decreasing consumer spending. Cost of revenue as a percentage of revenue for the quarter ended September 30, 2008 was 41.8%, an increase of 3.7% or 38.1% for the same period last year.

Cost of licenses as a percentage of revenue increased as our product mix weighted more towards products bearing higher royalty rate. Cost of services increased as a percentage of revenue as compared to the prior year but decreased in absolute dollars as compared to the three months ended June 30, 2008 as we delayed certain infrastructure and cost increases. Gross profit decreased $405,000 or 11% to $3.189 million for the three months ended September 30, 2008 as compared to $3.594 million for the three months ended September 30, 2007.

Our current cash position at September 30, 2008 was $15.200 million, an increase of $1.261 million from the balance of $13.939 million at June 30, 2008. Cash provided by operating activity decreased $595,000 to $1.279 million for the quarter ended September 30, 2008 as compared to $1.874 million for the three months ended September 30, 2007. Our GAAP income from operations decreased $568,000 or 78% to $163,000 for the three months ended September 30, 2008 as compared to $731,000 for the three months ended September 30, 2007 while net income decreased $689,000 or 79% to $187,000 or $0.02 per diluted share for the three months ended September 30, 2008 as compared to net income of $876,000 or $0.08 per diluted share for the three months ended September 30, 2007.

Our non GAAP results excluding the effects of SFAS 123R stock base compensation expense on all periods are as follows:

Our income from operations decreased $539,000 or 60% to $360,000 for the three months ended September 30, 2008 as compared to $899,000 for the three months ended September 30, 2007. While net income decreased $660,000 or 63% to $384,000 or $0.04 per diluted share for the three months ended September 30, 2008 are compared to net income of $1.044 million or $0.10 per diluted share for the three months ended September 30, 2007.

Anna Chagnon

At the beginning of the year, our goal is to achieve double digit revenue growth while increasing our investments in sales, marketing and research and development to support both our new and growing product line and the result of these investments would increase shareholder value in the years ahead.

At the end of our second quarter, we expressed concern over the general economic conditions in the US and decided to delay certain plans and infrastructure expenditures for the remainder of 2008 to focus on profitability. In the third quarter, our concern about the changing economic outlook affecting large software purchases and consumer spending caused us to further adjust our spending and expenses to ensure profitability despite lower than anticipated revenue.

As a result, we were able to achieve a net profit of $187,000 for the quarter and we include it in our cash and cash equivalents for the third quarter by $1.261 million despite the decreasing revenue of $324,000. As you may know, some of our businesses are dependent on consumer spending and the portion of our revenue consists of royalties from the sales consumer products such as televisions, cell phones and printers. We also sell phones directly to consumers through our MyPhone's website. We did see a decline in revenue from consumers overall that we believe was driven by lack of consumer confidence in late September due to market conditions.

In addition, major software purchasers from some corporate customers were delayed due to longer approval processes and sales cycles resulting from economic concerns in the United States and Europe. As the third quarter is also generally slower than other fiscal quarters due to the two summer months, the combination of all of these things led to the decreasing revenue Jim explained.

Paying careful attention to economic concerns that are aside of our control, we reduce spending in September to offset any revenue slowdown that might occur. As the result, we were profitable for the quarter and our focus on maintaining profitability on a go-forward basis. As often with companies of our size, we do not have complete control of the market forces and recessionary pressures that may impact revenue from time to time. By maintaining profitability, strong cash balances and no debt, we are well positioned to remain stable and we are going to go our plans going forward.

Despite the decline in revenue as compared to Q3 2007, we are very excited about the potential for each of our businesses in the years' ahead. Over the last quarter, we have been able to successfully increase our pipeline. We have added several new and exciting opportunities with the goal of increasing the list of hardware and software manufacturers using our Fonts and Font rendering technology. The great news about these opportunities is that they represent long-term revenue to our Company as our technology has integrated into the hardware and software of third parties as part of the long-term development strategy.

We generally receive a small up from an access fee and royalties quarterly based on shipments volume. Although it has been through royalties fluctuate with the consumer buying behavior as they did during the third quarter and do take a while to get started due to developmental lee time, we believe the broader opportunities is good for our technology that can support a long-term growth strategy for this part of our business. Over the last couple of months, we have also had some new and exciting possibilities for our ThunderHawk Browsing software. We are working diligently towards finalizing these possibilities and hope to be able to make public announcements soon.

Some of these announcements will involve new product directions that have opened up for our software during this time period and we will discuss these product directions as the announcements are made. For our Pageflex products, our price lines remain very strong. Although we are experiencing longer sale cycles and higher approval requirements for sale, the opportunities for this software in the long term continue to build. A great example of this is the Pageflex User Conference that we held in Boston over the last two days. We had over a 180 attendees at the event which is more than double the number of attendees we had for our first conference in 2007. This is due in part to the expansion of our customer base and the increase importance of our software to our customers.

Despite economic uncertainty and budget constraints of our customers, we felt investing in attendance with the user conference was an important one and for many, it would be the only event they attended this year. We found that many were relying on Pageflex software as the core part of their business and the tying hopes for the growth in revenue and cost savings our software can provide.

Another good planning in revenue from supporting maintenance contracts from our services work is increasing because of our expanding customer base and offering. Also the awareness for our stock and increase our trading volume, we are participating in more investor focused event. Our first event is the Wall Street Analyst Forum next week in New York.

The Wall Street Analyst Forum sponsored annual investor conferences that provide a forum to meet with buy/sell side analysts and portfolio managers from money market firms. We hope to continue educating the market on the opportunity the Company represents for investors in the months ahead.

As you also now we completed two stock buyback this year. In total, we repurchase 843,400 shares of our stock for $5 million since December of last year. We have announced recently whether we are considering another stock buyback. We do consider stock buyback on an ongoing basis but with recent advance, we are currently focused on maintaining a strong cash position and have not yet decided to bring you additional stock buyback at this time.

Maintaining a strong balance sheet will also give us the ability to take advantage of potential merger and acquisition activity which also presents itself during these types of economic times. Due to market uncertainties, we are not providing forward guidance today for the fourth quarter other than just saying we are striving towards at goal at the beginning of this year while understand that market conditions and economic concerns may continue to worsen in the months ahead. To be cautious, we have pullback on expenses to focus on profitability in the event that our revenue generations continue to be impacted by forces outside of our control. Our goal is to maintain profitability and cash flow generation to ensure stability while striving for growth.

Thank you for your continued support. We are now happy to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Glenn Mattson - GTK Capital Partners LP.

Glenn Mattson - GTK Capital Partners LP

Good job on controlling your expenses and trying to stay profitable in these difficult times.

Anna Chagnon

Yes, thank you.

Glenn Mattson - GTK Capital Partners LP

On ThunderHawk you said, you had some announcements shortly including some new product directions but when are we going to start to see some revenue here or some alignments instead of regard some serious directions previously going to Java and going to PDAs as well as cell phones. These are all directions but it sounds like this is more the same or when should we expect some intangible here you think?

Anna Chagnon

Again, I really cannot comment but it is then to say we are working on some pretty exciting things and the soon as they are completed and we have won them, we can announce them and we will do so at that time unfortunately we cannot say anything else.

Glenn Mattson - GTK Capital Partners LP

That is what we are looking for, I know in some revenue, directions we have had a lot of in the past.

Anna Chagnon

I understand.

Glenn Mattson - GTK Capital Partners LP

That will be good if we got the [winnings] because you have directions. Now a recent resource that Microsoft is making a deal to align with Verizon to be the world default search provider. Would you fit in any way into this shape [18.33] situation?

Anna Chagnon

Again, I am not directly familiar with that particular announcement to comment on it, Glenn, but I can just say that there are numbers of companies providing search options and our software does allow for us to include a third party search component into our software and we currently use Google for that purpose but there are opportunities out there potentially in future to partner in both types of strategy.

Operator

Your next question comes from the line of George [Gavi] - Western International.

George [Gavi] - Western International

On the ThunderHawk, how many people, I know you have a lot of people at the beginning that you have done with for a quite while that were looking at this product, how many now you really think you have a shot with and what do you think that, what is your best guess on announcement that you will be able to make or doing business with one of them?

Anna Chagnon

Again, George, I am trying to be careful here. We cannot really talk about specific relationships and the timing is still unknown. The good news is that the things are moving forward and these companies are also facing economic pressures and they are in discussion about last very long period of time. We do believe in our strategy. We are really struggling in this product line and we believe the things that we are pursuing right now are going to be wonderful for the Company but I cannot put a pricing on it and I think at this point, I would be reluctant to do so anyway given how long that is already taken so I just want the shareholders know that we are diligently pursuing it because we believe in it and we will announce as soon as we can know.

George [Gavi] - Western International

But without mentioning any name, how many of them you are still actively working with?

Anna Chagnon

I cannot disclose that information.

George [Gavi] - Western International

Even without mentioning names?

Anna Chagnon

Even without mentioning names. This is a public forum and I do not want to give conflict to our competition on what relationships we are pursuing. There are several. We have always been…

George [Gavi] - Western International

I do not want any names. I just want to know how many you were really still active with.

Anna Chagnon

There are several. That I can say.

Operator

(Operator Instructions) Your next question comes from the line of Todd Marvel - Raging Capital Management LLC.

Todd Marvel - Raging Capital Management LLC

Just kind of comment a little bit what you saw in September on the phase of I guess the…and the environment tightening up and are you seeing any of those deals that did not close in September coming back to you?

Anna Chagnon

Absolutely. I mean the great thing about September if there is a problem with clients in September is that we did not lose greater number of deals to competitors or because of our technology offerings. It nearly was just on odd slowdown that we have seen before for example in 2001 when economic events or events in the world make everybody take a [pregnant poll] as they say. So there are deals that were stalled at the end of September that have since closed. There are deals that are the pipeline that are actually growing since they end in September because people are still want to go forward because they want to go forward in bigger way but the approval cycles have gotten well and they have to go up unto higher levels of authority with major software purchases to get it and that may continue in Q4 because there are still of course concerns and pulling back on budgets.

So the good news for investors is that it is not a situation of deals that completely going away forever. It is more of a sense of a slowdown and people being much more cautious which we have experience before and what is just happening is that revenue gets smaller during the times that people are taking longer but the revenue have actually comes in and so our goal is just to make sure we close it that business whenever it is comfortable for our customers to close that business.

Todd Marvel - Raging Capital Management LLC

Got you.

Anna Chagnon

And now in consumer spending, we do rely partially on consumers buying and we did sense that weakness was predominately the last two weeks of September after all the announcements about the bank failures and consumer concerns over the economy and that is one thing that a lot of our competitors and a lot of people in our industry have also expressed they felt it exactly the same time.

Todd Marvel - Raging Capital Management LLC

Yes, I saw that. Would you say that there is an increased softness on the corporate side or more from the consumer?

Anna Chagnon

I think there is an increased softness more from the consumer side. I think from the corporate side, it is more of a delaying process and I guess we have been here before, for example, some of our software programs are fairly expensive purchases and those are the things that we tend to see slowdown but they happen and that we use just to be patient and let your customers put it in their budget like where they can put it for their comfort. The good news is mentioning the Pageflex User Conference for example, we just about an increasing number of customers at that conference despite the economy is bad and it is affecting your business but the Pageflex software is the one thing that really is growing or is driving their growth or they have all their face in. So they do see our software as vital to their business which is a good time for us to wait through this kind of economic time and we have to be patient.

Todd Marvel - Raging Capital Management LLC

Great. Just a couple of more questions, did you see any currency impact in the quarter?

James Dore

We do not do a lot of hedging. We have learned a number of points of sales which are in foreign currencies but it is not a major portion. The thing that will happen now is that we are seeing a decrease in foreign sales or interest on delaying because of the cost of the dollar but the amount that we have, it has not contributed too much to other clients.

Todd Marvel - Raging Capital Management LLC

Got you and I think I might have miss something in your prepared remarks but you mentioned something about hardware and software integration and if so, can you just go to that a little bit?

Anna Chagnon

Sure. I mentioned that we have a little increase in our pipeline for sales of our Fonts and Font rendering technology on the lower end basis, so hardware and software manufacturer and the great thing about those types of deals is that once they are solidified and it happen the revenue become a force for many years to come. They do take a long while to close and it did take a long while to actually pay us back because the royalties are based when they are shipped so development cycles can be long but what is nice to see or what is the good side for us to go to future is that there is a lot more opportunities out there that has recently come to life that we are very excited about that in that phase.

Todd Marvel - Raging Capital Management LLC

And just in terms of your continued pullback on expenses, where do you see a lot of these future expenses being cut from?

Anna Chagnon

Well basically, it is not so much that we are cutting in any material way other than we are not spending into personnel and we are not spending in things like variable marketing spends in a way we had originally planned if we were growing at the same rate that we had hope to be growing at. So instead of putting new people on the payroll back that would impact our profitability, we decided to delay those decisions into next year to see how the economic world affects us going forward and we think that is the safest thing for us to do. I think the good thing for them overall is that we do not think this will impact our business but what we are doing there as a matter of fact, we still think we have the people that we need, our staff that work with us today that can do a great job for us. So really it is just about just pulling back a little bit on spending money before we have the revenue numbers coming in.

James Dore

Now, our third quarter operating expenses were down about $250,000 from the second quarter and in Q4 with the savings in between, somewhere it is less than a quarter of a million.

Todd Marvel - Raging Capital Management LLC

Okay. So that is when we carry the rest, plus or minus $250,000 in savings?

James Dore

Yes, we did stay at that in Q3 and we will try to continue that in Q4.

Todd Marvel - Raging Capital Management LLC

Okay and that is sequentially, right? Period over period.

James Dore

Yes.

Todd Marvel - Raging Capital Management LLC

Which is it?

James Dore

That is going to be the same level of expenses Q3 so Q4 will be about the same level.

Todd Marvel - Raging Capital Management LLC

Okay, great and just on ThunderHawk, any of those potential opportunities that is going to be material revenue opportunities?

Anna Chagnon

It is possible but these are definitely there for them to be back. Again we just really do not want to promise things for the shareholders before all are said and done or make commitments that six months from now people are expecting us to move up to when we are still in the middle of, again, in this time.

Todd Marvel - Raging Capital Management LLC

Understood and that is it. Thanks again for all of your hard work.

Operator

This concludes our question-and-answer session. Do you have any closing comments for the group?

Anna Chagnon

Well we just want to thank you again for your support and we appreciate all that you have done and we hope to talk to you next time.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.

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Source: Bitstream Inc. F3Q09 (Qtr End 10/31/08) Earnings Call Transcript

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