Monotype Imaging Holdings Inc. Q3 2008 Earnings Call Transcript

| About: Monotype Imaging (TYPE)

Monotype Imaging Holdings Inc. (NASDAQ:TYPE)

Q3 2008 Earnings Call

November 12, 2008 8:30 am ET


Michael Kern - Investor Relations

Douglas Shaw – President and Chief Executive Officer

Scott E. Landers - Senior Vice President and Chief Financial Officer


Ralph Schackart - William Blair & Company, L.L.C.

Richard Davis - Needham & Company

Sterling Auty - J.P. Morgan

Ari Klein - Banc of America Securities


Good morning, ladies and gentlemen, and welcome to the Monotype Imaging third quarter conference call. (Operator Instructions)

I would now like to turn the call over to Michael Kern. You may begin.

Michael Kern

Thank you and good morning, everyone. Thank you for joining us for Monotype Imaging's third quarter conference call. With me this morning are Doug Shaw, President and Chief Executive Officer, and Scott Landers, Senior Vice President and Chief Financial Officer.

Before we begin, I'd like to remind everyone that matters we're discussing today and the information contained in the press release issued by the company earlier this morning announcing our third quarter financial results that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements, including predictions, estimates, expectations and other forward-looking statements, generally identifiable by the use of the word believes, will, expects or similar expressions, are subject to risks and uncertainties that could cause actual results to differ materially.

Accordingly, participants on today's call are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinion only as of today's date, November 12, 2008. Information on the potential factors and detailed risks that could affect the company's actual results of operations is included in the company's filings with the SEC.

The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in our third quarter press release or on this morning's conference call other than through the filings that will be made with the SEC concerning this reporting period.

In addition, I'd like to remind you that today's discussion will include references to adjusted EBITDA. We define adjusted EBITDA as earnings before net interest expense, income taxes, depreciation and amortization, and share-based compensation. Adjusted EBITDA is a non-GAAP financial measure that is consistent with the definition we use with our lenders. We also reference the non-GAAP measure of net adjusted EBITDA, which is intended to serve as a further complement to our results, provided in accordance with generally accepted accounting principals.

Reconciliations of the non-GAAP measures not found in our press release can be found on our website, along with a link to today's call under the Events & Presentations section in the Investor Relations part of our website at Both the call and the supplemental financial information will be archived on our website for one year.

And now I'd like to turn the call over to Doug Shaw. Doug?

Douglas Shaw

Hello and thank you for joining us this morning to go over our third quarter results.

Overall, we experienced strong OEM revenues, a softening of Creative Professional revenues, and a continuation of solid profitability and cash flow. I'll begin with some perspective on this performance, then I'll talk about the outlook for our business. I'll also discuss what we're doing to position the company for long-term growth and why we believe we're prepared to weather the challenging economic environment with the opportunity to emerge as a stronger company.

First, let's take a look at our financial performance. In the third quarter, total revenue increased 4% over the third quarter of last year to $27.3 million. OEM revenue increased 8%, while our Creative Professional revenue decreased 5%. On prior calls we've said that a portion of our Creative Professional business tends to be less predictable and more sensitive to economic conditions. During the third quarter, this was especially true.

Drilling down further, the weakness in the quarter was tied primarily to our direct, indirect and custom Creative Professional businesses. On the other hand, our Creative Professional ecommerce business delivered double-digit revenue growth compared to the third quarter of last year.

As mentioned, our OEM business is strong. Our laser printer business continued to outperform the expected market growth rate and newer OEM businesses continued to meet our expectations, driven by design wins within the mobile space and other CE markets.

Despite modest revenue growth, Q3 adjusted EBITDA increased 15% over the third quarter of 2007 and we achieved adjusted EBITDA margins of 44%. During the third quarter we also delivered diluted earnings of $0.12 per share and cash flow from operations of $7.1 million.

As you may have seen noted in this morning's earnings release, we made the decision to restructure our work force. This change is part of a larger initiative to identify areas of efficiency across our businesses in order to increase our investment into long-term growth initiatives while still being able to generate strong profitability and cash flow.

This process resulted in a small reduction in our work force, the redeployment of existing resources, and the ability to invest without significantly increasing the company's cost base. We expect to incur a severance charge of approximately $900,000 that will be reflected in our Q4 income statement.

Now I'd like to switch gears and focus on some of the product and partnering announcements that have occurred since our last earnings call.

A couple of weeks ago we launched FlipFont, which lets consumers personalize their mobile phone with fonts. Consumers can choose fonts that appeal to their taste, to jazz up the user interface with a font that's fun, or to make text easier to read. To give you an idea of how it works, users connect to our online menu of fonts from their mobile phone. Fonts are selected, purchased, and then safely downloaded and installed on the phone.

We launched FlipFont with Vodafone U.K. on selected handsets, opening a new revenue opportunity and enabling Vodafone to be the first operator to offer this kind of solution in Europe. We intend to expand into different phone models, operating systems and platforms, and into different parts of the world.

We see FlipFont as a unique addition to our product portfolio, to help us reach new and existing OEMs and network operators.

During the third quarter we also announced a design win with Shark Corporation of Japan, the country's largest handset manufacturer. As part of its efforts to grow beyond the Japanese market, Shark is targeting China and turned to us to satisfy aesthetic requirements as well as the requirements of the Chinese government. Shark licensed our iType font engine and a selection of Chinese fonts which were customized by our subsidiary, China Type Design. Today, Shark handsets embedded with our fonts and font technology are deployed in Mainland China, Hong Kong and Taiwan.

And under an agreement signed earlier this year with HTC of Taiwan, a rapidly growing company in the mobile sector, fonts from our Helvetica typeface family have recently started to ship in the company's new high-end phone called the Touch Diamond.

Our focus on Asia markets also extended to our latest technology introductions. Just last month at the Symbian Smartphone Show in London we introduced Version 4.1 of our iType scalable font engine, which supports our new Edge technology. Edge provides OEMs with what we believe is the industry's most compact solution to deliver high quality, legibility and typographic style, a combination that is especially important for Asian markets. Through Edge, OEMs no longer must sacrifice style to conserve memory for supporting the thousands of characters in East Asian languages.

Edge debuted with a selection of fonts for simplified and traditional Chinese, Japanese and Korean writing systems. We began presenting this new offering to handset manufacturers for evaluation at the end of October.

Now I'd like to discuss our strategic growth initiatives, how we intend to fund them, and how we will continue managing the business for a high level of profitability.

Challenges and change are new to Monotype Imaging. Over the years, we've built an industry leading text imaging business for the printer industry and we've established multiple avenues for growth. Our growth platforms have emerged in an evolutionary way, where we've been able to leverage our printer sales, marketing and engineering expertise into emerging areas such as mobile phones, GPS and other consumer electronic devices.

As we move forward, we believe these growth opportunities warrant increased direct investment. For example, we are expanding our local sales and support presence in Korea, China and Japan. This will help us to better serve our existing customers as well as acquire new accounts. We are also adding sales, marketing and engineering resources in support of our mobile offerings as these have passed the market need hurdle and are progressing to the technology adoption and deployment phase of the market life cycle.

Part of our growth strategy is also to pursue complementary acquisitions, strategic partnerships and third-party IP. In support of this, we recently hired a new Vice President of Business Development to focus on growth opportunities. Dan Gerron joined Monotype Imaging in September, bringing more than 17 years of business planning and financial analysis to his new role. Most recently, he served as VP of Mergers and Acquisitions at Pitney Bowes.

Turning to our outlook for the remainder of the year, we expect revenue for fiscal 2008 to be between $110.5 million to $112 million. This represents an annual growth rate of 5% to 7% compared to 2007 and compares to our previous outlook of $112 to $116 million. Our adjusted full year guidance is based on our visibility into our OEM business for this quarter and our expectations that portions of our Creative Professional business will continue to experience softness. We expect adjusted EBITDA for the full year to be between $47.4 and $48.9 million, with an adjusted EBITDA margin between 43% and 44%.

Adjusted EBITDA for 2008 includes approximately $900,000 in severance, $1.2 million in secondary offering expenses, and half a million dollars in non-cash foreign gains on the company's intercompany loan. Backing out these items, our net adjusted EBITDA guidance is $49 to $50.5 million, consistent with our original adjusted EBITDA guidance. Scott will provide more information with respect to 2008 in a few minutes.

I'd like to finish with some high level thoughts on our view of the business in 2009 as we approach the new year.

While the economic environment remains challenging, we continue to expect to outpace the market growth rate forecast within our printer OEM business. A leading industry analyst currently projects 5% to 7% laser printer unit market growth, but updated projections that consider recent global developments have not been published. Taking this uncertainty into account, we are still targeting growth but think the levels should be moderated. We plan to share a more detailed view of our printer OEM business during our Q4 earnings call after updated customer and market data is available.

We expect our other OEM businesses to continue to grow in 2009. Our growth will come from adding new customers and increasing penetration within existing customers. We are still in the early stages of these market developments and see a lot of opportunity ahead of us.

With respect to Creative Professional, we continue to anticipate solid growth from our ecommerce portion of the business. In the non-web portion of the Creative Professional business, we expect to continue feeling pressure from economic conditions, with revenue to be approximately in line with the third quarter of this year.

As for profitability, we plan overall spending levels to be slightly higher than in 2008. We believe we can gain efficiencies across the organization, but as I mentioned, we expect to reinvest the majority of these savings back into strategic growth areas.

At this point I'd like to turn the call over to Scott for a more detailed look at the quarterly financial results and our 2008 outlook. Scott?

Scott E. Landers

Thank you, Doug, and good morning, everyone. I'd like to start by reviewing Monotype Imaging's financial performance, highlight some of the major drivers in our business this quarter, and then add some more detail around our outlook for the remainder of the fiscal year.

Revenue in the third quarter was $27.3 million, up 4% over the third quarter of last year and up 8% on a year-to-date basis. In light of the current economic environment, we wanted to give you some more insight into the company's revenue channels. Approximately 70% of the company's revenue is generated from OEM customers who embed our IP into their hardware devices or software programs. This channel is comprised of manufacturers of printers, mobile phones, other consumer electronic devices, as well as independent software vendors.

OEM revenue increased $1.5 million or approximately 8% year-over-year, in line with our expectations. As Doug mentioned, our traditional printer business outperformed the expected laser printer market growth as printer OEMs continued to add more of our technologies into their devices. The balance of our OEM business generated high single-digit growth year-over-year, benefiting from increased penetration in mobile phone, digital camera, and personal navigation device markets.

Approximately 30% of the company's revenue is generated from our Creative Professional business. Roughly half of our Creative Professional business is derived from ecommerce transactions. Our ecommerce revenue continued to grow at a double-digit rate versus the third quarter of last year.

The remaining half of our Creative Professional revenue is generated from direct, indirect, and custom font sales which consist primarily of high-dollar sales of fonts and custom type to customers such as large publishing firms, corporations and ad agencies. This revenue is exposed to the softening economy. Revenues from this portion of our Creative Professional business experienced a double-digit decline from the third quarter of last year. We had anticipated some softness in this area when we previously provided our guidance; however, the economic climate deteriorated considerably from that point and, as a result, the softness we experienced was greater than expected.

Gross profit margins excluding the amortization of acquired technology were 90% of sales in the third quarter of this year compared to 92% in the third quarter of last year. The decline was primarily due to product mix.

Marketing and selling, R&D and G&A expenses totaled $13.8 million for the quarter, representing an $800,000 or 5% decline from the third quarter of last year. The decline was primarily driven by a $1.4 million decrease in share-based compensation expense offset by increased Sarbanes Oxley costs of approximately $300,000. We had our highest level of SOX-related spending in the third quarter, and we expect to see less spending in this area going forward as our year one SOX implementation comes to closure.

Operating margin for the third quarter was 30%. This compares to 27% in the third quarter of 2007.

Other expenses declined approximately $3.8 million quarter-over-quarter. This was driven by lower interest expense resulting from a combination of lower debt balances and lower interest rates as well as the absence of a $3 million loss we incurred in the third quarter of last year related to the extinguishment of our second lien credit facility following our IPO in July. We continue to effectively deleverage and remain focused on paying down our debt and reducing interest expense.

The long-term currency swap we entered into in the second quarter served to reduce the significant foreign exchange fluctuations we experienced earlier in the year. In the most recent quarter, the impact of foreign currency fluctuations on our intercompany loan was a noncash net loss of approximately $400,000.

Our effective tax rate for the third quarter was 27% compared to a tax benefit in the third quarter of last year. In the prior year, the tax benefit resulted from a reduction in German tax rates on our deferred taxes. In the current quarter, our tax rate was impacted by our ability to take full advantage of a single state tax apportionment methodology. Our annual tax rate is now expected to be approximately 39%.

Net income for the quarter increased to $4.4 million, up approximately $2.9 million compared to the third quarter of last year. On a per share basis we generated positive earnings of $0.12 per diluted share in the third quarter of 2008 compared with a loss per diluted share of $0.09 in the third quarter of 2007. The third quarter 2007 loss resulted from a $3.9 million reduction to net income available to common shareholders for the accretion of convertible redeemable preferred stock. This was fully converted and redeemed in conjunction with the IPO last July and we will not see this charge going forward.

Adjusted EBITDA in the third quarter was $11.9 million, up $1.6 million or 15% from the $10.3 million reported in the third quarter of last year. Included in adjusted EBITDA is a noncash loss of approximately $400,000 associated with our intercompany loan. As Doug pointed out, our adjusted EBITDA margin was 44% in the third quarter, up from 40% in the third quarter of last year.

Cash flow from operations was $7.1 million for the quarter and $24.6 million on a year-to-date basis, an increase of 35% compared to the first nine months of 2007.

Cash and cash equivalents as of September 30, 2008 stood at $28 million, an increase compared with $19.6 million as of December 31, 2007. Total debt outstanding at the end of our third quarter was $116.1 million, which was down from $131.4 million at the end of 2007.

Those are the key financial highlights of our third quarter, and now I would like to spend a little more time on our cost savings and expense reallocation.

The management team has spent considerable time evaluating the business operations and metrics as well as prioritizing the necessary investments to position the company for long-term growth. This process resulted in cost savings and redeployment actions designed to support the funding of a targeted list of investments for 2009 without meaningfully increasing the cost base of the company.

The team was focused on a few high-level goals - one, maximize efficiency within existing businesses; two, identify the necessary investments for long-term success; and three, maintain meaningful profit and cash flow during an uncertain economic climate. To this end, we conducted a small work force reduction and we expect to incur a severance charge of approximately $900,000 that will be reflected in our Q4 income statement and is reflected in our updated 2008 guidance.

Now turning our outlook to the full year, we currently expect revenue for the full year to be between $110.5 and $112 million, which represents a growth rate of 5% to 7% for the full fiscal year. This is just below the low end of our prior guidance of $112 to $116 million for the full year 2008, with the reduction driven by lower-than-anticipated revenues from portions of our Creative Professional business.

We continue to expect gross margins, including amortization of acquired technology, in the range of 88% to 90%, and we expect operating expenses to be in the range of $65.2 to $65.6 million. We expect our adjusted EBITDA to be in the range of $47.4 to $48.9 million. Adjusted EBITDA for the full year 2008 includes approximately $900,000 and severance charges associated with our work force reduction, $1.2 million in secondary offering expenses primarily associated with the first half of 2008, and $500,000 of foreign currency gains associated with our intercompany loan.

Taking these items into consideration, the company's net adjusted EBITDA is $49 million to $50.5 million, which is consistent with our original adjusted EBITDA guidance. We now expect diluted earnings per share to be in the range of $0.40 to $0.43 assuming a full year effective tax rate of 39% and a fully diluted average share count of approximately 36 million shares.

For fiscal 2008, we also expect to generate approximately $30 million in cash from operations. Under the terms of our credit agreement, this should result in a clawback payment of approximately $11 million, which is payable in March of 2009. This clawback payment allows us to accelerate our debt repayments, lower our fiscal 2009 interest expense, and we expect to be able to grow our earnings per share at a faster rate than revenue.

To summarize, very few companies, if any, are immune to short-term challenges presented by an economic slowdown; however, we believe the leverage in our business model, our ability to generate cash flow, strong execution and our commitment to manage our business for high levels of profitability position us well to weather the storm.

And with that we will turn the call over to the operator to begin the question-and-answer session. Operator?

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from Ralph Schackart - William Blair & Company, L.L.C.

Ralph Schackart - William Blair & Company, L.L.C.

Doug, if you sort of just gin out everything that's going on in the ad market - I know it's tough to be an economist at this point - if you look into 2009 knowing what you know today and given your conversations with your customers and end markets, do you still think that the top line grows in 2009 over 2008?

Douglas Shaw

Knowing what we know today, yes, but the qualifier of what we know today. When we talk to our OEM customers and, of course, we're spending more and more time with them now just given all the uncertainty out there, they are still talking about growth in their units going forward.

We're not sharing our OEM customers telling us that they expect dramatic falloffs. We're expecting it, frankly, because we read the same things in the paper that everybody else reads, but to date it really is business as usual when we look at our printer OEM business and look at our mobile phone or digital camera business. We think there's a dose of reality to come, but it hasn't come yet. So one reason we're not giving more substantive guidance for 2009 is we feel that maybe the industry analysts are a little optimistic talking about 5% to 7% unit growth next year.

So we're going to spend this quarter working closer with our customers and try to get people like IDC to update their forecast and use those.

Ralph Schackart - William Blair & Company, L.L.C.

And let's say the scenario at the end of '09 was that unit volumes were actually down 5% to 7%, how would your business weather that storm on the top line?

Douglas Shaw

So what's happened before - and I don't want to get too confident - but the nice thing about laser printers is the business model for those folks is in the consumable part of their business, so they have a big incentive to ship units. And what that usually means is they drop their price to a certain level to get the units out.

And as you know, Ralph, our pricing is based on unit shipped; it's not a percentage of what they sell it for, so if history repeats itself - we saw this in 2000-2001 - we think that the overall, let's say, printer market will potentially drop from a dollar standpoint, but from a unit standpoint it could be, you know, flat or up marginally or down marginally. So we don't expect a significant revenue drop from our standpoint.

And on the mobile phone, digital camera side, we only have 10% or so market penetration, so as long as we can sign up more accounts, even if the whole market is flat, we think we can grow that business.

Now on the Creative Professional side, as we've said, we do think that half of our business, roughly $15 million a year, is absolutely susceptible to tightening of budgets, and that's what we saw in Q3.

Ralph Schackart - William Blair & Company, L.L.C.

If you look into 2009, then, just to focus on that end of the business, how shall we think of that just in aggregate? About half of it's in a decline - and you talked about e-tailing up, I mean, that might be a business that might be flat at best sort of next year? Is that a good way to think about it?

Douglas Shaw

Yes, I think that's a good way to look at it, that half of our business is the web and that grew at double digits. The other half is direct, indirect and custom, and that dropped - well, the whole business dropped 5% year-on-year, so clearly the falloff we saw on the non-web business was bigger than what we saw, the uptick on the website, so yes, I would say, frankly, best case is flat next year, the economy stays where it is. It might actually drop a million or two. But again, we're spending a lot of time working with our larger customers to see what their buying patterns are.

Ralph Schackart - William Blair & Company, L.L.C.

And then just on the tax rate, it seems like it's 39%. Is that, for modeling purposes, a good rate that we should use for '09?

Scott E. Landers

It is a good rate.

Ralph Schackart - William Blair & Company, L.L.C.

And then can you remind us just on your cash tax that you pay, just as we look at sort of cash generation in the business between GAAP and -

Scott E. Landers

Yes, sure. Our cash taxes run about $4 million less than the 39% rate would lead you to believe.


Your next question comes from Richard Davis - Needham & Company.

Richard Davis - Needham & Company

The Creative Professional side of the business, is that a human part of the business as opposed to, you know, download the font like we do on the retail fonts? And if so, have you thought about how you're going to manage the staffing on that side and if the cuts that you announced today come in that area?

Douglas Shaw

I think the answer's yes to that multi-part question. Roughly, again, $15 million or maybe $16, $17 million, half of our Creative Professional business is on the web, have not seen a downtick. This is a $24 kind of purchase.

But the other part of our business that has seen a downtick is licensing large order size font collections or custom orders to people like, you know, commercial printers, ad agencies, companies who see printing and publishing as the way they make their money. And if ad income is down, then you can see commercial printers decide to decrease the amount of things they buy, like type. So we're doing a good job on the onesies and twosies orders off our web and that's growing, but the bulk orders have seen a drop off. And as far as our restructuring, yes.

So basically what we're doing as a company is reducing costs in several areas where we saw inefficiencies, but it was the Creative Professional business that saw the largest reduction. And then we're taking those expense dollars - in some cases, those people but in some cases not  and then reinvesting those dollars into growth opportunities like our OEM mobile business, our FlipFont, and other products that we haven't announced yet.

So the net of the whole thing is, as we've said, we're planning on spending a little bit more money next year from an expense standpoint this year, it's just in different buckets where we really see high growth opportunities.

Richard Davis - Needham & Company

What is your debt bond rating? Do you have a debt bond rating? Have you been rated at all or not?

Scott E. Landers

I don't think so, Richard.

Richard Davis - Needham & Company

And then the last question is I was at this Macrovision analyst day and one of the things they talked about is they're trying to push the web to your TV set. And I know you guys do a lot of font displays on smaller, obviously, [form factors], but as you know or you probably know, if you try to pull a YouTube video up to a TV that's bigger than 24 inches, it looks dreadful. And obviously you guys may not do the graphic side, but the fonts could certainly be something that you would think you could do.

Do you have the capability or have you thought about or engaged with anyone to try to figure out how to display gigantic fonts, in other words, on larger TVs? Is that something that you think about or is that an opportunity for you guys?

Douglas Shaw

It's absolutely an opportunity for us. We spent a lot of time and money, frankly, about five years ago on this whole interactive TV push, where the TV was going to be the gateway to your home and it would become your primary information source. And we know that whole interactive TV platform kind of stalled, but the byproduct is we have agreements with people Scientific Atlantic and Mitsubishi, [inaudible], Panasonic, so several of the large TV folks to help them show good-looking type on a set-top box or on the TV itself.

We know exactly what Apple's up to with Apple TV and it's definitely something that we're looking at. It's right in our sweet spot. That's what we do, good-looking type. It just happens to be a big visual platform.

Richard Davis - Needham & Company

And then one really quick question on the dollar or the hedge you guys have. Does that take you all the way through '09?

Scott E. Landers

It does.


Your next question comes from Sterling Auty - J.P. Morgan.

Sterling Auty - J.P. Morgan

Can you walk us through - in terms of your large customers, I believe there was some change in the structure of how the payments would flow to you guys this year - can you talk about how that may have impacted the quarter?

Douglas Shaw

Oh, good question. So there was only one change. It was a printer customer that used to pay us in Q1 and Q3. They paid us in total, I think it's about $800,000 in those two payments, so it's about $1.5 million customer. So in Q3 we normally would have seen, let's say, $800,000 roughly from that customer. What we saw was a $400,000 and now we'll see another $400,000 in Q4. So it was a little - the nice thing from our standpoint is now we'll see royalty payments on a quarterly basis versus twice a year.

So we had a little bit of a pickup, I guess, in Q3 because of that, but not a huge number.

Sterling Auty - J.P. Morgan

And then can you talk to us about what the FX impact was on revenue and expenses? Because I think you talked about the intercompany loan, but what kind of FX impact did you just see in terms of the revenue and expense side?

Scott E. Landers

Yes, Sterling, we have a pretty good natural hedge on the operating profit or EBITDA line, so I want to say it was less than $100,000 - $150,000. And this quarter we actually saw a pretty small impact on the revenue line, again, I want to say it was less than $100,000.

Next quarter, we're thinking FX could have a bigger impact on revenues. But again, on the EBITDA line, we've got a pretty good natural hedge with the amount of revenues and expenses we have overseas that end up matching up. There's a fair amount of our revenues in the U.K. and in Germany that are actually denominated in dollars, which is where we end up building the hedge because then the revenues and expenses zero out to a large extent.

Sterling Auty - J.P. Morgan

And then you kind of talked to it, but I just wanted to make sure I understand where the cuts were coming from. Is it only in the CP side of the business or is it broader ranging?

Douglas Shaw

It's broader ranging. It's in areas such as [I dev] development, so today our platform is on a dot net base and - you know, the company we bought two years ago - they're a Linux-based platform, so what we're doing is we're putting all of the company's ecommerce websites from a backend standpoint on the same platform.

We've done things like on the administrative side where, because it makes sense for us to have dedicated employees or sometimes use consultants, we're hiring an additional attorney to help us with processing of our contracts, which ends up being much more cost efficient than using as much outsourcing as we've done.

So it really is across the board. We looked at every one of our business and said, "Where can we be more efficient and what's not core to where we're going?"

Sterling Auty - J.P. Morgan

My last question is you talked about HTC and their high-end phone using the solution, but there was a couple of other very high-profile wins that you've had over the last year and I think some of those products were expected to hit the market at the end of this year, the beginning of next year. Can you just give us an update in terms of your thoughts around some of those bigger OEMs? Are they still on target to do that and how did that factor into kind of your preliminary color in 2009?

Douglas Shaw

So Garmin's shipping; they started shipping last quarter. We're getting good royalty - actually getting royalty payments in line with what we expect, but we want them to, obviously, license more of our products in more of their platforms. OpenTV, I don't believe is shipping yet, so we haven't seen the win there. I'm trying to think of other - Verizon Wireless, that's more of a way for them to help promote our technology with their customers, their handset suppliers, so they've introduced to a lot of platform developers we think will be helpful.

So I'd say nothing dramatic, but everything is kind of chugging along like we expected. And we hope that turns into significant revenues next year, which is what we expected. This year almost all those are, well, well under $1 million a year kind of individually paying us, but they're sloping in the right direction.


(Operator Instructions) Your next question comes from Ari Klein - Banc of America Securities.

Ari Klein - Banc of America Securities

I think, Doug, you mentioned last quarter that you started seeing some weakness in the higher-end printer market on the OEM side. What sort of exposure do you have to that market and I guess how did it perform this past quarter?

Douglas Shaw

In rough terms what we expected to see is that the printer market and units base would grow 5% or 6% - that's what IDC was forecasting - and that's what happened. So the units in total grew roughly at that pace, and we outperformed that by 2% or 3%. So our printer business was roughly 8% or 9% up from where it was the year before.

I do know looking at royalty reports for the high-end digital copier folks, just like we saw in Q2, it's off a bit, but not any - to memory, Q3 wasn't down any more than Q2 in that segment. We'll run some rough numbers and I'm going to guess it's about 5% or so of our printer revenue comes from those high-end devices.

Scott E. Landers

So it'd be probably 2% to 3% of our overall revenues.

Douglas Shaw

Right, right.


Mr. Shaw, at this time I am showing no further questions.

Douglas Shaw

Okay. Well, if there are no further questions, let me briefly summarize.

Our business is fundamentally sound, our strategy is clear, and we remain focused on driving long-term profitable growth. Thank you all for joining us and have a good week. Thank you.


Thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for participating. You may now disconnect.

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