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Bitstream, Inc. (NASDAQ:BITS)

The Wall Street Analyst Forum Call Transcript

November 18, 2008, 9:10 am ET

Executives

Anna Chagnon – President and CEO

Unidentified Speaker

Hi, good morning ladies and gentlemen. In our ongoing attempt to adhere to the published schedule I like to introduce the next company in this morning’s program. As you’ve seen from the schedule, for the morning it is mostly technology companies, semiconductor, software, IT-related and then late in the morning and early afternoon it is biotechnology, specialty pharma, life sciences.

So the next company in this technology piece is Bitstream. Bitstream is based in Cambridge, Massachusetts, and they are a software development company focused on bringing unique software products to a wide variety of markets. The company’s core software products include award winning fonts and font rendering software, mobile browsing and messaging software and variable data publishing and Web-to-print software for personalized marketing.

The company was recently named number 25 on the list of Fortune 100 Small Businesses by Fortune magazine. The Boston Globe also name Bitstream as one of the top 100 companies for 2007. The Boston Business Journal included Bitstream on their 2007 list of the 100 fastest growing companies in the region. Without any further introduction I would like to introduce Anna Chagnon, who is President and Chief Executive Officer of the company.

Anna Chagnon

Thank you. I feel rather short up here. I apologize. High podium. I am Anna Chagnon and I am President and Chief Executive Officer of Bitstream and my goal today is really to tell you about our company, the products that we offer and of course our financial results to give you some interest in our stock.

For a brief overview, Bitstream was actually folded in 1981 as a font foundry and for many of you who may look at me and say fonts, people actually buy those today (inaudible) they still do. And I will explain to you how that is done and why it is done. We became public in 1996 on our font business. We’re currently traded on NASDAQ under the symbol BITS.

We are seeing our company today as it grew in the 90s early 2000, 2001 from being just a font company into a broader software development company. The purpose of that really was to diversify the business, the font and font technology businesses is a very interesting business, it is a very big cash generator for our company, but it wasn’t necessarily in a growth market indicative of being a public company.

So we expanded into two different areas after that point which I will explain to you in a moment. And as a result this will be our 19th consecutive quarter prior to this of growing revenue. We’re also profitable and we’ve no debt and we have cash in the bank. So all – for all fundamental reasons we really do have a stable and profitable business that is growing into the future.

We have 27 years of experience in the font and font technology area. We bring this up only really to mention that we have been around a long time. We are a small public company. We kind of were reborn in the early 2000-2001 timeframe when we started to diversify. We’re now a global organization with employees across the world. One of the things that was pointed out was we were recently named last year 25 on 2008 Fortune Magazine’s list of America’s fasting growing small public companies and we’re very honored by that.

We have a seasoned management team whose shortest tenure at the company is over eight years. So we have all been at this for a while and we’ve all been a part of this success and we’re all very committed to the company. We’re focused clearly on growing the business we are still small and on profitability and maintaining stability for the future.

So, just to give you an idea of the products that we offer and what our business really is all about. There are really four major product lines for the company today. Fonts and font technology, which is really including font and font rendering software into devices and software programs. So when you look at your handheld device, your cell phone today, you are going to see fonts in your device and you may like your fonts, you may not like your fonts. You may see a font that is unique to the branded device you carry. All of that is about fonts and font technology and creating a unique user experience. So that has been our business for a long time and one we’re very proud of.

One of the things that we did to diversify like I said in the early 2000-2001 time frame was we started a website for buying fonts online. At the time we thought it would be a nice little business. It is now a nice big business. It is millions of dollars of revenue a year to our company and represents an untapped market for consumers buying of fonts and we will talk a little bit about why consumers actually do buy fonts today.

But in addition to that we really did diversify at the time frame I talked about. One of the big diversifications we did was we started pageflex. That is a different brand name for a product line that is focused on variable data publishing and Web-to-print. It basically is about bringing one-to-one and personalized and customized marketing communications through software to end users and this has actually been one of our fastest growing segments and one of the segments we’re most proud of today in terms of our overall structure of our company.

And then last but certainly not least is the baby of the family as we call it, ThunderHawk is a browsing solution that is still getting off to market in this time when people are now looking at mobile browsers and we will talk about how that is related to our business overall.

So in the first category why would you want fonts and font technology? What is OEM fonts and font technology? Well, basically the idea is that you want to put fonts rendering into a device or into a software program. So we sell this technology to OEMs, original equipment manufacturers who build it into their products. So our fonts and font technology are in cell phones, they’re in television sets, there in what is called set-top or cable boxes. We’re also in a wide variety of software programs as well. That is all the idea of you want render text to screen and display different types of text. And that text may not be just Latin based characters that may also be worldwide characters like Hindi, or Hebrew or Arabic.

So when you start taking devices to the national level and international level the issue of font rendering becomes a complex one and that is one that we solve as a company and have for many years.

Who would care about this? Well, this is just a brief list of who would care about this. These are the types of customers that we sell to today. They could be anyone from your cell phone manufacturer to somebody building equipment for medical devices that needs to render text on screen to television sets to the like.

So what is the market potential for this when you’re trying to assess us as a company? Well basically think about the idea that you read text everywhere. And this type of technology can be embedded virtually into anything anywhere across the world. We’re just now starting to really get into new markets for this technology over the last couple of years we have really gotten into the cell phones place for example, which was a new market to us a couple of years ago. And the reason that was a new market is people started to really need scalable text.

If you think about the idea of being on your computer where you take a piece of text and you expand it to be 12 point, 14 point, and 16 point. Several years ago people did not have the technology built into a phone because they really didn’t see a need for it. But your phone today is more of a computer than it ever was. So the idea that applications are coming down to your phone raises a need for scalable text as much as your computer.

So this is one of the first growing markets for us. It is really going into that space and selling scalable outlined text to people. The great thing about this business is that we do receive per unit royalties in general from hardware manufacturers and annual fees from software manufacturers that allows them to ship. So depending on how many printers are shipped with our technology or cell phones or whatnot that is a growing revenue stream. And the more placements we have the better that gets.

But also in addition it is a long sales cycle. And I caution people when we talk about deals. It does take about a year to get a deal done because they have to actually license the technology and then embed the technology into the device and then we get paid once that is shipping on the market. The other thing though the plus side of that it that is that once it is embedded into their technology it becomes something that is very hard to remove and doesn’t immediately get removed in every sense of the word. So it is a long revenue cycle but it is also a long pay back cycle for us. And we have some deals that have renewed for many, many years.

In this space and all of our spaces are slightly different. Just we talk about the types of customers already. Our major competitor is Monotype Imaging. That is a new public company but has been around. It used to be a division of Agfa Corporation and it is a much bigger company than we are but it only sells into the printer space and makes a majority of its revenue from that space. We are actually more diversified than them but are smaller and fast growing.

The next segment of our business is the myfonts website and a lot of people look at this and say, well who buys fonts online. But you would be amazed how many people buy fonts online. We actually have over 780,000 customers to date on this site who have bought a font online. And realistically, if you think about it. If you’re doing wedding invitations or your kids’ soccer party invitation and if you’re doing something creative like scrap booking you may find fonts inherently useful and you may actually get addicted to buying them for various applications. So we have found that this actually is a big segment of our business and really a fast growing segment of our business because every quarter we get new users.

As a matter of fact in September we had our highest new user acquisition rate that we have ever had. So it is definitely something that continues to grow and something that we’re very proud of. And the other thing abut it is when people buy on the site they generally come back again and again because a font is a renewable resource in some respect. It is something you buy once in one file but if you want to be creative you’re going to buy another and then another. So, over 50% of the buyers on this site each quarter have previously purchased from prior quarters on the site. So they come back again and again.

To go with myfonts really though is to be the, we used the call Amazon.com [ph] of font. It is the idea that you want one site where you can find any font that you’re looking for and you can find easily by searching through generic terms. So this is like just a copy of the current home page although we’re going to slight redesign next year that actually will change that one. But just to give you an idea it is really geared towards consumers, it is geared towards the average person who doesn’t know the neighborhood font foundry and doesn’t really know where to find fonts necessarily but knows they want a font that looks scary for Halloween or they want a font that looks nice for the holiday season.

And so they can type in a search like holiday or Halloween and get a list of fonts that kind of matches certain criteria. The searching mechanisms on myfont.com are part of what makes it unique. The other thing that makes it unique is the scanning technology called buck a font. What the font actually is the idea that you could scale in any piece of text and we’ll tell you what font it is or what fonts closely match it. So if you are somebody trying to imitate something like the (inaudible) logo which is a very thin font. You can do that just by scaling it in and we will tell you for free what font in the 55,000 or so that we offer will actually solve your problem.

The potential really here is unknown because it really is tapping into an unknown untapped market of consumers buying font. What we have done though it has been wildly greater than all of our expectations we set several years ago and we just currently don’t see an end in sight to the number of users coming to the site. The New Year user acquisition rate is just an example of that.

The site also has built tremendous customer loyalty. Over 50% of these as I mentioned have come back to the site. So that is a good thing. In terms of a business metric, we receive usually a one time license fee. The license fee is set by the foundry. And in general that could be about $25 a font for a perpetual license to the font.

Our key customers as we mentioned are consumers but also we have designers and corporations who buy fonts every day for the businesses. Again Monotype is one of our leading competitors that has a general site focused on fonts as we do and we also have other fonts sites that focus on specific fonts foundries.

The disadvantage of these sites of course it that it is a very narrow segment of the market and what we’re trying to do is aggregate it all into one place to make consumers buy from one spot.

The third technology area is one of our fastest growing technology areas over the last several years is the pageflex (inaudible). And that is variable data Web-to-print and cross-media software and I’m going to get into some examples for the software and hardware experience as you are not from the industry.

What basically what we’re really doing here is we are bringing one-to-one and one to many marketing to documents using software to automate the way. We have our own composition technology. We’re one of the few companies in the world that own our own composition technology that gives us the ability to compose documents and deal with hyphenation and justification. And we do offer it modularly. So, as you grow into this area you can grow, you can start small and grow big.

So how is pageflex software used? Well, you can do it from everything from creating print advertising from our website to doing very sophisticated personalized marketing campaign. That includes things like doing a print campaign that is a postcard that does to a personalized web site and the it is followed up by a personalized and customized e-mail. We will talk a little bit about what I mean by personalized and customized because it is much different than the dear Jane and dear John that you saw in the past. But it is also is used for building marketing portals, really doing heavy duty marketing, graphically rich documents and also for internationalization.

So here are some examples on. This slider here really just shows you a marketing portal. The gray area that you see on the left is really the marketing portal where people can come in and pick out marketing documents they want to create internally. And what you see going across the bottom of the page is three different documents designed using a similar template. That template really is a document that is designer designed and in each piece of that template there is a tag that chooses variable content. So, for example, you know those titles that change. This could be your average get up there and enjoy the ride; those are all changing based on what they know about the user.

So, in this case the example is that somebody goes to the sporting goods store and they’re interested in a certain type of sport. They further answer to the sport question they actually get a document and coupon and location information like the location they want to go to printed into the document. So instead of giving you a document that is generic. They giving you a document that is specific to what they know about you.

Another example how pageflex software is used (inaudible), is what we call the interactive experience. That is the idea that people can actually go online to a website. This is the concept of Web-to-print and design a document that can be sent out to one person or to many people. So, this is the idea of going online and creating a brochure, creating a postcard, even creating something you are sending as your holiday card this year and letting people actually designed that document online. We have software that allows you to do that and allows you actually to create those documents through just a web browser.

Another example of what pageflex offers (inaudible) is customization. And that is the idea that you actually have a document that needs to be customized in some way. Now when we talk about customization, we don’t simply mean the personalization of the past where you just took somebody’s name and their address. We actually talk about making the document change dramatically. If there is content you know needs to go to a particular user. So you take a database of records that have certain content information in it and you tie that to a template and then based on what they know about you, the whole document may change. This is an example from the Washington State Department of printing uses our software and they actually use it to do an online resource to develop brochures for their work force and those brochures change with actual people and images changing. Based on what they know about you and who your appropriate contact might be in the industry.

Another example of pageflex software is multichannel options. Multichannel options is simply the idea that you can have a web site to design multiple types of collateral and you can design all of those from one or two templates. So that if you’re trying to create a very unique user experience and unique brochures you can actually do that through a variety of channels including brochures, coupons, wires, personalized web sites et cetera.

Another example is internationalization. Just as content can vary through a document to talk uniquely to you, you also might have the issue of just having different types of content depending upon where you’re sending your brochures in the world. So what you can do in this case is use our software to internationalize the document. We don’t do the translation if possible, we allot you a sort of a template the changes based on the language that you need to use it at any given time. So if you are a major corporation you actually need to have language coverage and like five or six different languages. You can design one brochure and the software will automatically replace everything in that brochure to be in the local language. So it is purely from a database again based on rules that you set up.

So what is the pageflex opportunity? Types of customers that we have. It is a developing market. It is one that actually -- it has actually been one of the first growing markets for us over the last couple of years. It really is about making people use software to generate unique collateral that decreases response rates back to you. So if you think about it used to be (inaudible) all that you will get a new mail is something that said your name and you thought, well, that was pretty cool because they knew who I was, but you realize soon thereafter that that there was really nothing they knew about you other than putting your name. Now that world has changed. So think about talking to your customers uniquely and telling them that they buy only certain things at your store that you know that and you want to give them coupons for what they buy. This is a coupon that they will not use. And all of that again is combining our software with (inaudible) database information that marries the two. So the document you produce set your customer is unique. What you get back from them is an increased response rate.

There are studies that show that response rates are double or triple what you would get than sending a blind brochure. So there is definitely a lot of ways this software can be utilized and we’re seeing different types of companies using everything from commercial printers to corporate marketing departments.

We also have partnerships with hardware manufacturers who develop presses that do the output for this type of device. So what is the potential? Well, variable data Web-to-print software is something that is a must-have for certain industries like commercial printing and marketing services agencies. But we’re also seeing a growing trend of corporate marketing departments wanting to adopt this type of technology to do their own marketing materials.

So, there is a whole big round that we haven’t yet tapped into. How is the sales done? Well, basically it is a straight software sale. We generally get about $35,000 to $40,000 on average per customer per sale, plus a 20% annualized maintenance stream. So there is an ongoing revenue component and a one-time component. It is the largest recurring revenue stream though for maintenance that we have as a company as a whole and it has been growing quite nicely over the last couple of years.

Major customers as I mentioned are commercial printers, the marketing services agencies and their corporate marketing partners today, although there is extension to this technology in a lot of different ways that we haven’t yet explored. Competitors we have a company called (inaudible) which is now owned by Xerox, which was a private company, small private company that did design based work for this market and (inaudible) which again is also a private company that does more ASP based offering for this type of technology.

And then lastly but certainly not least is ThunderHawk. ThunderHawk is the baby of the family. I saw this is all serious business. It is the product lines that we are currently trying to get off the ground. It is a mobile browser that actually is based on our font and font technology and the purpose behind it was that we wanted to be able to present a lot of tech to the small space. So, if you about our legacy in fonts and font rendering technology you will really notice that it makes sense. What we’ve done is married that technology with the browser to give people the ability to browse on various handheld devices.

One of the things we believe in is that users want full html browsing. They want to see the actual web page they see on their desktop. That is what is familiar to them. It is what they know the best of. So, what we are going to do is basically marry that browser with our font technology to give them those web pages that allow them to view them in different way in different monitors.

One of the things that sets us apart from our competition is what we call the split-screen mode. This is the ability to divide the content into two sections. The top is what we call the minimum [ph] that shows the full web page. But we know that is pretty unreadable even on the phone and the bottom section displays the magnified content from the minimum. So, you have seen the box at the top, displays in the box at the bottom. The content in the bottom is readable and it really allows users to use a very small device to see a lot of content and zoom into what they are most interested in seeing. This actually is a patented technology. We intend to protect our technology with patents whenever possible. So, we do think this is a competitive advantage.

Another big competitor advantage of our browser is the fact that it has levels of magnification. If you think back to what I said in the beginning about font technology being about scaling text you think now looking at a browser now that makes sense because what you’re doing here is saying as a user you may have different visual acuities, as you may need to have text to be very small because it fits the most information and that is what is best for you, or you may want it to be larger. So, one of the things that is also unique about our browser is you as an user can decide how big or how small the text is. So, you can decide where your comfort level is. So, one of things we think that is critical for mobile browsing and mobile application development is the ability for people to read on screen and be comfortable doing so. So, this really sets us apart.

In terms of the potential for ThunderHawk, many carriers and device manufacturers today are looking at ways to bring mobile browsing to the phone. ThunderHawk is a client server based technology and it is a very significant to wireless carriers in particular because it can be ubiquitous across multiple devices regardless of manufacturer. Our advantage -- a couple of our advantages are the magnification, the split screen navigation but also the speed with which you actually see pages. Because it is quite server based we can give you a very fast experience.

In terms of potential markets, this is yet an unproven market for us. If I include a per device royalty like we saw in font rendering and also per user per, per view royalty and share hosting because depending on who is hosting the server, which we also can do and have done, we might get a piece of that as well. And also most of the technology we have is under ThunderHawk patent group, so it does set us apart and protect us against the competition that is out there. And with the advent of the iPhone, this is an area where a lot of scrambling to create iPhone like experiences on other devices. We are very hopeful that we can get some deals closed in the near term on this market.

To talk about the key customers, in terms of competitors Opera, probably is the most known, mobile browsing company. Again we think we have competitive advantages to them but they are the market leader right now, and (inaudible) which is the largest U.S. public company who also offers browsing in this space.

In terms of just showing you selected Bitstream you get a feel the level of customers that we work this. (inaudible) a long list of customers that work across multiple business segments. You will see hardware device manufacturers, software companies. You will see brand owners those are generally pageflex customers who use us for their collateral development. You’ll see television companies who use our font rendering technology which really gives you a good feeling for the fact that we have a list of customers who rely on a technology today.

From a financial perspective this is a revenue overview for the last several years. As you can see we have been rapidly growing since around 2001. 2008 numbers, of course, are through September 30 for our fiscal year and company. So we have one quarter to go to hopefully make that higher than before. But we have been growing fairly strongly over the last several years which is why we have received the accolades that we have.

From an operating profit perspective, at ‘05 we turned the quarter from losing money into actually making money. We are actually generating significant amount of cash at the moment. We’re totally cash funded. We don’t have any debt as well. But as you can see our focus is on profitability and ‘08 again is just a partial year.

In that net profit kind of follows the same track and we are again focused to make that the best that we can make it while still growing the company at a good rate. And that is actually the end of the presentation. There are some brochures that were put out during that presentation that is on my box. If you are interested in taking a set of information please feel free to do so. And now I am happy to answer any questions you might have.

Question-and-Answer Session

Unidentified Analyst

(inaudible question)

Anna Chagnon

Well, it is interesting for example, on myfont, the consumer site, people buy actually more of the font that are free with a particular program than they -- you might think because in some respects they might not have the program and they might have the font available for some reason and they are trying to make it fit with what they originally use. So, we do see a lot of people come back to supply what we call system level fonts. But the other end of it I think there is a portion of our market that will only be using the fonts that are free in the world and that we get that. We understand that. That is not the market we are going after. We are going after the people that are more creative and wanted to be unique and stand out. So, our goal is really just to built out so much variety in fonts and some much uniqueness in fonts, so people see fonts as something creative in the world and not just something that comes from Microsoft office.

Unidentified Analyst

(inaudible question)

Anna Chagnon

The question was what is the strategy about penetrating Asian and emerging markets. Basically there is actually a double edged strategy there. The first is that with fonts and font technology, along with what is complicated in the world in terms of emerging markets like India is the rendering of Hindi text because their work are called complex languages that means that depending on what letter is before and what letter is after the letter in the middle may actually change completely .So, we have actually software that deals with that and is able to do what is called contextual substitution. So, it is able really to change the words as they come out and as they are written across the page. So, that actually makes this very interested in those markets and actually has sold a variety of software into those markets. In addition to the browsing space in particular, people use cell phones in developing countries like we would use our computers and one of the things that make scalable tax and browsing so important in those markets is this maybe the only way they get to the internet. So, if you think about using your computer and cell phone, we really use them as two separate things here in the US, but there the cell phone becomes the computer. So, the ability to scale text and also to browse on your phone and have a full rich environment which is fully html, any web site is important to those countries and we think we can deliver both of those things.

Unidentified Analyst

(inaudible question)

Anna Chagnon

Well, actually it was combination of things. I mean as all of you know, Q3 was kind of a dicey quarter for a lot of people. It is actually a seasonal quarter over cyclical in the market because of the two summer months. So, the question is actually related to what I said on my earnings release call. At that time, we said some purchases were delayed a lot of those purchases had happened. People just got a little slower at the end of September wanting to see how the markets would turn out and how the bank crisis would turn out. So, we are very hopeful that is that is continuing, but we also make money from sales of consumer products. So, we are tied a little bit to the consumer market and of course that makes us cautious in this economy. So, the great thing is that we have multiple products in multiple segments and the great thing about that has always been it helped us to balance our revenue and to create strength in different types of markets depending on what happens ahead. So --

Unidentified Analyst

(inaudible question)

Anna Chagnon

Well, we actually don’t report our revenues and segments based on our product lines. We actually run the business as a whole. That way we don’t segment reports. So, we don’t disclose individual revenue segment. What I would say to you is that, the font rendering the myfonts and the pageflex software are all major contributors to the revenue stream of the company. They are fairly close depending on the quarter and the year they are cyclical to each other and then ThunderHawk really is the new thing that is a small portion of our revenue today but we have high hopes for it going forward.

I encourage you to take a piece of literate at the back if you are interested and if you have any questions please let me know. Thank you.

Unidentified Speaker

Thank you. I think everyone knows Anna will be available for about 40 minutes for a breakout session. So, you are welcome to join her if you have some follow up questions. If you want to re-access her PowerPoint presentation or the web cast you can get access on our website at analyst typing conference.com. In just a couple of minutes we will introduce PC Connection.

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