Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Monotype Imaging Holdings, Inc (NASDAQ:TYPE)

Q4 2012 Earnings Call

February 14, 2013 08:30 am ET

Executives

Staci Mortenson – Head-Media Relations

Doug Shaw – President, Chief Executive Officer

Scott Landers – SVP, Chief Financial Officer

Analysts

Steve Frankel – Dougherty & Company

Ross MacMillan – Jefferies & Company

Matthew Kempler – Sidoti & Company

Saket Kalia – JP Morgan

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Monotype Fourth Quarter 2012 Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

I would now like to turn the conference over to Staci Mortenson of ICR. Please go ahead.

Staci Mortenson

Thank you. Good morning, everyone. Thank you for joining us for Monotype’s Fourth Quarter and Full-Year 2012 Financial Results 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 fourth quarter and full-year 2012 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 words believes, will, expect 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, February 14, 2013. 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 fourth 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 net adjusted EBITDA and non-GAAP diluted EPS, which are intended to serve as a further complement to our results provided in accordance with Generally Accepted Accounting Principles. A reconciliation of these non-GAAP measures can be found in our press release. In addition, a link to today’s call can be found under Events & Presentations in the Investor Relations section of our website at www.monotype.com. The call will be archived on our website for one year.

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

Doug Shaw

Hello, and thank you for joining us this morning. Monotype had an excellent fourth quarter and full year, capped by record performances in both our Creative Professional and OEM businesses. For the quarter revenue was $39 million, a 23% increase over 2011. For the full year, revenue increased 22% to $149.9 million. Non-GAAP net adjusted EBITDA for the quarter increased to $16.5 million or 42% margin. For the full year, non-GAAP net adjusted EBITDA was $64.2 million or 43% of revenue, an 18% improvement year-over-year.

Taking a look at Creative Professional, revenue for the quarter was $14.8 million, up 87% over 2011. For the full year we achieved $51.8 million, an increase of 64%, driven by strength in e-commerce sales, continued momentum in our direct business and acceleration in our web fonts business. In OEM revenue for the quarter was $24.2 million, a 2% gain over 2011. For the full year, OEM reported $98.1 million, a 7% increase year-over-year, driven primarily by growth in e-readers, tablets and independent software vendors within Display Imaging. Our Printer Imaging business performed in line with our expectations, with the core printer segment growing in the low-single digits and 7 out of our top 10 OEMs experiencing unit increases.

Monotype had a very strong 2012, as a growing number of brands turned to us for the typefaces, technology and expertise they need to deliver high-quality user experiences. Over 60% of our revenue came from our growth businesses, Creative Professional and Display Imaging, up from approximately 50% in 2011. We strengthened our business on a number of fronts, as we continued to diversify, expand our IP and invest in support of our long-term growth initiatives, all while delivering significant levels of profitability and cash flow.

2012 was a year marked by record financial results and several key achievements including, we met our financial and strategic goals for our web font business, our number one growth initiative. We launched a first of its kind font rental system, SkyFonts, which has the potential to revolutionize how fonts are used in the creative workflow. We signed nine automotive contracts and extended our thought leadership position with the font study with MIT AgeLab, which brought worldwide attention to typefaces on vehicle displays. We executed on our growth and diversification strategy, which was accelerated by the acquisitions of Bitstream’s Font business and Design By Front’s Typecast application. We expanded our global footprint with a new R&D facility in India. We strengthened partnerships as we teamed up with Adobe to bring more than 1,000 web fonts to their creative cloud. And we established a dividend program, which we are now increasing by 50%.

Today, we face the world as a new Monotype with the look that reflects who we are, people who are passionate about providing the very best in typefaces technology and expertise. Our focus is to help customers succeed in a complex world where content flows across multiple platforms and device medium. We provide what customers seek. Typefaces look great in any language and in any environment. We offer unrivaled flexibility in how fonts are deployed and consumed. Our aim is to help ensure brand integrity, clarity and beautiful text everywhere.

Essentially, Monotype is all about solutions for content, from creation to distribution and consumption. Content creators like publishers and authors need typefaces and workflow solutions to express creativity and brand. Content distributors like networks and browsers need to deploy content quickly and consistently. And finally, content consumers like e-readers and tablets need text to display as the author intended. Our goal is to fulfill the need of this content continuum and seamlessly connect everything that creates content to everything that consumes content.

As we look forward, Creative Professional is on pace to become our largest business. A major catalyst is web fonts which enables fine typography on the web. We’re still in the early days. However, as we approach 15% market adoption, we believe we’re on the cusp of broad acceleration. We expect to double our web font revenue in 2013 from $5 million to over $10 million, as brands increasingly turn to us to ensure look that’s consistent in design, tone, content and behavior. Recent customers include Disney, DreamWorks, Spotify, Maserati, Mongoose, MGM, Ruth Chris and IOP.

Enhancing the web through a high quality type and workflow solutions is a major focus for Monotype. We’re excited about the Typecast application, which came to us from our most recent acquisition. Typecast is unique because of lets designers work directly in the browser to easily create beautiful websites with full typographic control. Just over two weeks ago, we held our commercial launch and now we are paying customers from 52 countries. Moving forward, we believe Typecast and other value-add technologies will be key components to the success of our web font offering.

Also last month, we released patent pending technologies that unlocks the ability to use advanced typographic features in web design, features that are part of OpenType fonts such as ligatures, swash characters and fractions. Not all browsers support these features on their own, but with our new technology that’s uniquely built into our web font service they can today.

In 2012, we launched our SkyFonts service, another industry’s first. SkyFonts allows people to try desktop fonts for free and then rent them for as long as they need – as long as needed. Last month we launched our service commercially, establishing a new approach to experimenting with Type, as well as an alternative to traditional desktop font licensing terms. 2012 was also a year we saw a significant increase in a number of large recurring creative professional deals. Customers such as publishers, agencies and corporations are turning to Monotype to provide the typographic solutions they need to expand into multiple publishing environments, including digital applications, the web, mobile and print. Recurring deals now represent close to 30% of our Creative Professional direct business, up from less than 10% two years ago.

In Display Imaging, our strategy is to develop innovations to optimize text on all displays, as we target industry leaders, secure new design wins, expand within account and take a leadership position in emerging markets. In 2012, we increased penetration into categories such as automotive displays, tablets and e-readers, with products from Ford, Amazon and Barnes & Noble. More recently, BlackBerry announced its BlackBerry 10 operating system, which includes our fonts and font technologies. The new OS features our Slate Pro typeface family, which was selected because of its high legibility.

In Printer Imaging, our strategy is to stay close to our customers, understand their needs and provide additional IP to support evolving requirements. In 2012, we saw a continued shift from traditionally just to Asian suppliers who serve emerging markets such as China, which is expected to hold more than 20% of the global laser printer market in 2013. Currently, Asian printer OEMs represent over 80% of our Printer Imaging revenue. Looking forward, we see opportunities in mobile printing and document workflow solutions, which require fonts, printer drivers and support for paid subscription languages.

Now, I’d like to turn to our 2013 outlook. For the full-year 2013, we expect revenue growth of 10% to 13%, or $165 million to $169 million. We anticipate net adjusted EBITDA to be in the range of $69.5 million to $72.5 million, which represents a margin of approximately 43%. We expect Creative Professional and Display Imaging to continue to drive revenue growth in 2013, as we take advantage of global opportunities in content creation, distribution and consumption. In Printer Imaging, we continued to anticipate revenue increases in the low to mid-single digits as OEMs expand into emerging markets. Having exited a successful 2012, we enter 2013 with lots of momentum.

At this point, I’d like to turn the call over to Scott. Scott?

Scott Landers

Thank you, Doug, and good morning, everyone. I’d like to start by reviewing Monotype’s financial performance and then provide more detail on our outlook for 2013. Revenue for the fourth quarter was a record $39 million, up 23% compared to the prior year. Creative Professional revenue increased 87% to $14.8 million. Our corporate customers continued to invest at record levels. Our solution is well positioned to meet content creators’ print and digital needs, and the addition of MyFonts has provided us with a very strong multichannel e-commerce offering. Our web font growth accelerated and we achieved our 2012 revenue target of $5 million. We’ve built a strong competitive position through the market’s early adopter phase. We strengthened our offering with complementary technologies like Typecast and are well suited to capitalize on future growth as the market transitions to mainstream adoption.

OEM revenue met our expectations and grew 2% to $24.2 million. We saw modest growth from our core printer business, while Display Imaging categories such as e-reader and ISV grew in excess of 10%. Growth was offset by a decline in our printer driver business. The year-over-year reduction was expected, as our 2011 results included non-recurring licensing deals and we also made the decision to reduce focus on (inaudible) solution.

Now, let’s turn to cost and margins. Gross profit margin for the quarter was 82% of sales, within our target range. Operating expenses totaled $20.1 million, an increase of $1.3 million or 7% compared to the prior year. The increase primarily relates to incremental operating costs associated with our 2012 acquisitions. Operating income increased 27% to $12 million or 31% of revenue. GAAP net income for the fourth quarter was $7.8 million. Earnings per diluted share were $0.20 and non-GAAP earnings per diluted share were $0.28. Net adjusted EBITDA increased 20% to $16.5 million, which represents a 42% margin.

Now, I’d like to turn to our full-year results. 2012 was a great year for Monotype. Over the past few years, we’ve laid out a strategy to capture emerging opportunities in displays and digital content creation. Our execution has strengthened the key pillars of our business model, including achieving significant topline growth, ongoing diversification of our business and increasing the visibility and predictability of our revenue stream. We also generated significant levels of profitability and cash flow, and implemented a dividend program while continuing to invest in the business.

To recap the year, revenue increased 22% to $149.9 million. Creative Professional increased 64% to $51.8 million, driven by double-digit organic growth and the addition of MyFonts. OEM revenue increased 7% to $98.1 million, led by double-digit growth in Display Imaging and moderate growth from our core printer business. Operating income increased 22% to $46.5 million or a 31% margin. We ended the year with 335 employees, an increase of 63. We added significant talent through acquisition and targeted hiring. Our investments have provided us with a greater talent pool in e-commerce, a new capability around web design, expanded research and engineering resources and greater breadth within our marketing organization.

Earnings per diluted share were $0.76 and non-GAAP earnings per diluted share were $1.06. Net adjusted EBITDA grew 18% to $64.2 million, representing a 43% margin. Cash flow from operations was $50.4 million for the full year, an increase of 28%.

Turning to the balance sheet, cash and cash equivalents as of December 31, 2012 sit at $39.3 million. Total debt outstanding at the end of the year was $22.3 million. Operationally, we integrated and leveraged our 2012 acquisitions within the first year. Our gross margin declined approximately 600 basis points to 83% due to the acquisition of Bitstream, which sells a higher percentage of third-party IP. However, our integration efforts have enabled us to reduce our operating expenses as a percentage of revenue by the same amount. These efforts include leveraging our G&A infrastructure to absorb the acquired operations, expanding our R&D footprint in India creating efficiency and reducing paper equipments. In addition, our business model of recurring revenue, profitability and cash flow enabled us to exit the year with more net cash than the prior year, even after $50 million of acquisitions were taken into account.

Our results also reflect continued investment in key growth areas. To capitalize on these opportunities, we have invested $100 million since 2010 through organic and M&A activities. We have done this while maintaining EBITDA margins in the low to mid-40s range. It is gratifying to see the positive impact on our diversification and emerging sources of growth.

We believe Monotype is a unique company financially, as well as in the marketplace. We funded growth and also leveraged the strength of our model to introduce a recurring dividend program. We’re confident in our model over the long-term. With that in mind, our Board has approved a 50% increase in our quarterly dividend. Our next quarterly dividend in April will be $0.06 per share, an increase of $0.02 from our last payment.

Now I would like to turn to 2013 guidance, which is slightly better than the high-level view shared on our last earnings call. For the first quarter, we expect double-digit growth in both Creative Professional and OEM. We anticipate total revenue of $41 million to $42.5 million, which represents growth of 20% to 24%. We expect gross margins to approximate 81% to 83% and operating expenses to be approximately $21 million. We expect net adjusted EBITDA to be in the range of $17 million to $18.5 million, non-GAAP EPS of $0.28 to $0.31 and GAAP EPS of $0.20 to $0.23.

For fiscal 2013, we anticipate revenue growth of 10% to 13%, which equates to revenue of $165 million to $169 million. We expect gross margins to approximate 82% and operating expenses to be in the range of $85 million to $87 million. We expect net adjusted EBITDA to be in the range of $69.5 million to $72.5 million, non-GAAP EPS of $1.13 and $1.18 and GAAP EPS of $0.81 to $0.86.

Our 2013 plan is driven by continued execution in our growth initiatives. We expect strong double-digit growth from our Creative Professional business. Trends supporting both e-commerce and enterprise momentum should continue and we expect to see web font growth accelerate, ending the year with revenue in excess of $10 million. OEM growth should trend toward the mid-single digit range. Our printer business should grow in line with 2013 annual assessment. In Display Imaging, we expect our per unit royalty revenue on devices such as e-readers, tablets and automotives to grow in excess of 20%. We should experience a cyclical slowdown in the ISV portion of our display business. ISV continues to be a long-term 5% to 10% growth opportunity. But we do experience growth swings tied to platform work for large ISV customers.

On a quarterly basis, our first quarter revenue should benefit from the holiday sales of devices such as e-readers, tablets and cameras. We expect revenue to be sequentially lower in the second quarter and then build during the second half of the year, as our web font and automotive initiatives drive the topline. From an investment perspective, emerging opportunities in displays and digital publishing are now making a topline financial impact, but we’re still in the early days of what we believe is a substantial growth curve. We will continue to aggressively fund our strategic initiatives to better understand the market opportunity, then innovate, partner and acquire to deliver more value to our customers. Organically, we will be investing in marketing and sales while absorbing the full-year effect of our 2012 acquisitions. Taking these investments into account, we expect to generate net adjusted EBITDA margins of 42% to 43%. We are excited about 2013 and look forward to sharing our progress throughout the year.

With that, we’ll turn the call over to the operator to begin the question-and-answer session. Operator?

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions) Our first question is from the line of Steven Frankel with Dougherty & Company. Please go ahead.

Steven Frankel – Dougherty & Company

Good morning. Congratulations on another strong quarter. Doug, maybe you could start by giving us some customer feedback on Typecast, that sounds like a pretty fast start to the product. Why do you think that happened?

Doug Shaw

We’re in the – an alpha and beta cycle for I think it was well over a year and just through all the social media initiatives and word of mouth, it was a really a nice community that was excited about the benefits of this product, which is within the browser to be able to develop beautiful websites with a real strong focus on the font side. So, they really had a pent-up demand frankly. And for the – particularly the first two weeks and now into week three, boy, I’m not exactly sure what their expectations were but I know our expectations weren’t that high and that really come out of the gate fast. So, it’s validation that we really do help with the workflow when it comes to high quality type of websites.

Steven Frankel – Dougherty & Company

Okay. And then on the Display Imaging side, you talked a lot about automobile that’s going to be a big part of the story for the next year or two. What’s the next category that you might target beyond automobiles?

Doug Shaw

I would say probably the next one would be TVs. So, when we acquired Bitstream, to their credit, they’d a handful of royalty bearing agreements that I actually was kind of surprised to find out about until we did the due diligence. And as high definition TV goes up, as the price point stay up there, we think that the need for high quality TV guide, interactive – I still believe the day will come when you do sit in your couch and you access websites and get your e-mail with all this content coming down. So, we’re having conversations with all the big guys and I would say TV is the next one.

Steven Frankel – Dougherty & Company

And would you target set-top box makers of as well in that kind of effort?

Doug Shaw

Absolutely. So, it really goes through the whole ecosystem where we go to the – right to the cable providers and then all the way back through the chain. Some of the big customers we’ve talked about are people like Samsung on the TV side and Panasonic, and we have older agreements with people like Scientific Atlanta and PowerTV, these are people that we’ve been working with for years.

Steven Frankel – Dougherty & Company

Okay. And then, I know that you talked about the SEO gains you had from – as you earned from Bitstream. Have we seen the full benefit of those or is there some more benefit to come in the next couple of quarters?

Scott Landers

Yeah, I think – so Steve, I think we’ve seen kind of quarterly basis the full benefit of those. Next year as we look at the comparables, we’re going to have an extra quarter of our acquisition expenses, so an extra quarter Bitstream but then also in our first quarter on a relative basis we should see savings year-over-year.

Steven Frankel – Dougherty & Company

Okay, great. Thank you.

Operator

Thank you. The next question is from the line of Richard Davis with Canaccord. Please go ahead.

DJ – Canaccord

Hey guys, it’s DJ on the line. So Doug, maybe you could talk about what you’re seeing in terms of trends with per unit royalties from the printer OEMs and maybe talk about unit expectations from your top accounts. I know you said that the Asian OEMs are faring better, but I am not sure where they fit in, in terms of revenue contribution. So, maybe just talk about kind of your best accounts on what you are seeing.

Doug Shaw

Sure. Yeah, it’s kind of amazing frankly. In some ways it’s counterintuitive, but for the last 2.5 years now into this quarter, our Q1 here, the business is trending at 3%, 4%, 5% kind of unit increase. It’s exactly what IDC has forecasted in their look-back and we scratch our heads frankly and say, but that’s all what you’d see in the press.

But when we look deeper into it, it really is market share gains with some of our customers, meaning the Kyoceras, the Ricohs, the Konica Minoltas, the Sharps, the Samsungs, the Asian suppliers are having worldwide – and then really them capitalizing on the biggest growth opportunity, which is China. Over 20% of the shipments next year of laser printers – actually this year, is going to come out of the Chinese market and a lot of those are smart printers with our technology in it. So, we’re writing that. So, printers has been – our printer business, laser printer business, has been incredibly stable over the last two-plus years and no signs that’s going to change in the next couple of years.

DJ – Canaccord

Okay, got it. That’s good to hear. And then on the web front – the web font side, have you guys had any traction penetrating the display advertising side or are we still early there? Is the focus still on just deeper penetration of core websites and maybe talk about how that progresses?

Doug Shaw

Yeah, that’s a great question. Yes. Right now, we are in the trial process, still working with a lot of the big players trying to – well, frankly, they are trying to figure out their business model in support of mobile advertising. I think they buy the concept that if a big corporation is going to have mobile ads, why wouldn’t they want to use their branded message to the market, meaning why wouldn’t they want to use the branded fonts.

DJ – Canaccord

Right.

Doug Shaw

So we think – well, we think we’ll ride along with that when it happens. But right now, it represents next to zero incremental revenue. But we’re convinced, there are just too many mobile devices out there that has got to be figured out and that we’ll participate in it.

DJ – Canaccord

Yeah.

Scott Landers

And DJ what we’re seeing from the traditional website is that the market is adopting close to that 15% threshold and so we’ve built a nice $5 million business here over the first two years. So, we’re really excited to see what happens once we cross that 15% adoption threshold on website and what we may be able to do given the value we deliver.

DJ – Canaccord

Right.

Scott Landers

Again, our focus there too is adding more value to our solutions. So, the acquisition of Typecast is a perfect complement to that and we’ll continue to look for other technologies to make our web font offering not only the home to the best fonts but to the best complementary technologies as well.

DJ – Canaccord

Got it. And then, Scott, may be just couple of quick financial ones. Tax rate for 2013, I mean 35% to 36%; is that kind of right number use?

Scott Landers

Yeah, 35%.

DJ – Canaccord

Okay. And then, what was organic growth in the quarter? And the reason I ask is it feels like as 2013 progresses you may see a gradual acceleration as we kind of get in the back half the year. So, what was in the quarter and is my supposition correct?

Scott Landers

Yeah, we don’t break it out specifically. To be honest, it is harder to get to because of what we’ve done with MyFonts, putting our IP over in the MyFonts site. What we feel comfortable with is we’ve got double-digit organic growth and then layering on the Bitstream acquisition on top of that as you look to next year at a 10% to 13% growth rate. That is about an 8% to 10% organic plus the extra, the one-quarter of Bitstream.

DJ – Canaccord

Got it. Okay, great. Thanks, guys.

Doug Shaw

Sure.

Operator

Thank you. The next question is from the line of Ross MacMillan with Jefferies & Co. Please go ahead.

Ross MacMillan – Jefferies & Company

Thank you and congratulations. I was just curious about seasonality; your Q1 guide is obviously up sequentially fairly materially and you made some comments around the strength of certain categories on the OEM side. Is this something we should think about as being more typical because I think this year and last year has been very strong in Q1 relative to Q4 and is just a function of the change of mix in OEM?

Scott Landers

Yeah, but we’re seeing more and more of that, Ross. So the more that our OEM business is tied to these holiday-type CE devices, we’ll see more of our revenues come in, in the first quarter. So, that’s exactly what’s happening on Display Imaging side. So, that’s why we wanted to lay it out for folks in our guidance because we expect sequential drop in Q2 and then a nice build throughout the back half of the year as our growth initiatives continue to be sequentially higher quarter-over-quarter.

Ross MacMillan – Jefferies & Company

That’s helpful. And just on the ISV part of OEM, it sounds like that was strong in 2012 and it’s going to be maybe a little bit of a lower growth rate in 2013 or a drag in 2013. Could you just remind us in rough terms how big that is within OEM?

Scott Landers

So within OEM – see if I’ve got the numbers right; it’s close to a $20 million business, that business. So again, there is different pockets of it from business we do with video game companies to traditional software players and then what we call our platform work with people like Microsoft and Google. But again, what you can find with these larger platform plays is we can do a substantial amount of business in one year and then go into kind of maintenance business the next year. So, 2012 is an absolute great year for us there. So, we do expect a drag in 2013 from that part of the business. That’s also why we wanted to break that out for folks so that they understand, when we’re getting per unit royalties in devices that are expected to grow fast we’re still getting really nice growth out of that. This is just an expected cyclical slowdown that we could experience every few years on the ISV portion.

Doug Shaw

Yeah, and maybe just a little bit more color, Ross. I know in Q4 we talked about having this killer growth in Creative Professional business, but OEM growth was only 2%. If you look at our OEM revenue last year, it was a tough compare year. If you remember the last year, in Japan they had the tsunami situation which stunted some of our Q2, Q3 sales. And then in Q4 on the printer side and also on CE devices like digital cameras and all the rest, we had a follow-over. So, we saw that as a bit of a catch-up Q4, which made it a tough compare. I think it’s important though that we are talking about double-digit growth this quarter in OEM business. Also for the whole year we’re talking about frankly the same kind of growth in OEM that we had this year. So this year where we talked about was OEM being up 7%, we know the printer was low-single digits, that Display Imaging would be double-digits. Display Imaging will have some challenges because of the ISV side. But when it’s all said and done, we’re going to grow just about the same rate on our OEM side this year as last. And of course, Creative Professionals is just on a really, really healthy double-digit growth rate.

Ross MacMillan – Jefferies & Company

So I know it’s far out, but it almost feels like the OEM business, as we think even further out, could grow faster just because the mix continues to move to DI, the ISC might be less of a drag and you’re going to start to have more revenue from some of the new incremental DI opportunities such as auto. Is that a fair way to think about it as we look even further out the curve?

Doug Shaw

I think you just nailed it frankly. On the auto side, for example, what we think is going to happen is the second half of the year we’ll see a nice pickup. I mean some of the models we’re now shipping in on the auto side is with GM, we’re in their Cadillac and Corvette; on the Ford side the Edge and Explorer; the Audi A8; Chrysler Grand Cherokee. But now we’re starting to get more information from our customers as far as exactly which models we’re in. And we do expect to see a nice pick-up second half of this year and then definitely in 2014.

Ross MacMillan – Jefferies & Company

One last one from me; just so I can frame the size, you mentioned an interesting stat around the recurring revenue on the CP side from your direct customers going from 10% two years ago to 30% now. Either that business in totality or maybe thinking about the recurring revenues within CP overall, how would you sort of size that or frame that for us just to get a sense for how much is sort of truly recurring now within CP? Thanks.

Scott Landers

Yeah, good question. So I’ll kind of reiterate what I talked about at the Analyst Day, which is our CP business in total. First, two-thirds of it comes from our e-commerce side. We consider all of that highly predictable, it’s high volume, low dollar transactions, it doesn’t have a lot of economic sensitivity. And that business, we’re obviously seeing our web font. Services business, we’re – it’s a small number, but it’s building as a subscription base.

When you look at the other – the remaining third of Creative Professional, which is what we call our direct business, that’s where we were specifically referring to a few years ago less than 10% of that business was recurring and now it’s approaching 30%. So that feels really good because that’s traditionally your high dollar, low volume sales, and getting more and more of those tied into a recurring stream is really good for the business long-term. And it also speaks to the value that we’re now providing because the issues that our customers face are more complex. And we’re solving problems across the broad spectrum from their print font needs all the way to digital and the applications that may fall in the middle. So it is – probably the biggest takeaway from the recurring revenue is substantiating the value we’re bringing to the market.

Ross MacMillan – Jefferies & Company

Great. Thanks a lot.

Operator

(Operator Instructions) The next question is from the line of Matthew Kempler with Sidoti & Co. Please go ahead.

Matthew Kempler – Sidoti & Company

Thank you. So first a follow-up on the automotive side; you said you’re starting to get some insight into what models your products are shipping in. So, can you provide some perspective on the nine contacts and what share of the automotive market do you think that represents?

Doug Shaw

Yeah, I’m sure I couldn’t tell you if I do; I really don’t know. What’s tricky about the OEM business, and we’ve just learnt from history, having done this for 25 years, is when you see you’re in a certain car, it’s hard to know are you across the entire product line, is it just a model that’s shipping in the US, the model that’s shipping worldwide. So until we actually get these royalty reports in-house, we have a skeptic eye. But I will tell you that history shows that what every OEM wants to do is have a common platform that they use across many cases, virtually all of their models. So once you get that point product – so my expectations are, with the models that we just talked about that – unless for some reasons we don’t make our customers happy down the road, I see no signs of that, we will spread dramatically across these different models, but it’s a beachhead.

Matthew Kempler – Sidoti & Company

Okay. And then on Typecast, based on the comments on the adoption rate there, from your view will this product on its own be a revenue driver or do you have more of your Typecast as a tool to pull in demand for your web font offering?

Scott Landers

Yeah, as we look at that specificity within 2013 guidance is I would consider it immaterial. I think the important part, and we’ll see how it plays out, whether longer term can it be a substantial value driver on its own. There is no doubt that there is significant value with it being wrapped in the total solution. So, we’re excited about it out of the gate, but I would stay tuned. It’s probably take us 12 months to get more of a view on do we think this could be a $5 million to $10 million application unto its own.

Doug Shaw

Right, and like we’ve talked, a little bit to the Analyst Day. This our first entry into workflow in the web, and if we get positive reinforcement from the market that this actually solves some real problems, then would it make sense for us over time to push those boundaries out and solve more of the problems.

Matthew Kempler – Sidoti & Company

Okay. And then we had a number of areas of investment in 2012; would you maybe share some of your priorities for 2013 and what your hiring plans are?

Scott Landers

Yes, so our priorities stay the same. So, our number one priority is our web font services offering and more and more of our resources are going behind that. Certainly, on the DI side it’s new device categories again that we’ve been talk about like automotive, like TVs. On the Printer side, we actually still think there’s more growth there. So we’re starting to investigate some new environments of how our technology can be used by the credit folks. I would say as far as year-over-year investments, a lot of our cost increases are coming from the full-year effect of our acquisitions. So, one of the nice things that our acquisitions have done is brought us really great talent. So the Bitstream acquisition, as we alluded to in the script, gave us a lot more e-commerce talent, a great beachhead in India. Our Typecast acquisition brought us 14 great web designers out of Northern Ireland. So organically, we’ll also be looking to fill out our marketing suite. So, we’ve put a focus now on product management and product marketing, which we think is going to be a key function for us as we move forward. But the short answer, which – I don’t usually give short answer; the short answer is a lot of the increases come from the full-year effect of acquisitions and we’ll make targeted hires to supplement.

Doug Shaw

And I think just a continued momentum of our marketing spend; as you know, traditionally that part of our business that’s been shortchanged in last year, we stepped it up this year. We’ll continue to step it up and it really is consistent with us being more of an end user focused company with Creative Professional.

Matthew Kempler – Sidoti & Company

Okay. And then last thing from me; on the printer side, the developed countries, are you getting any sense that there might be some pent up demand building similar to what we saw coming out of the 2008, 2009 recession of the U.S. where clients have just been putting off upgrades and at some point they’re going to need to go out and stop purchasing laser printers again?

Doug Shaw

Yeah. I think the safe answer to that question is it feels like it’s more of the same. What’s happened for the last 2.5 years is going to happen again. There are pockets of good news out there, but I think the safe thing – I know what we’re doing internally is assuming it’s going to be kind of like where it was last year and then see if we can take advantage of some of these new initiatives.

Matthew Kempler – Sidoti & Company

Okay. Thank you.

Doug Shaw

Yeah.

Scott Landers

Thanks, Matt.

Operator

Thank you. (Operator Instructions) The next question is from the line of Saket Kalia with JP Morgan. Please go ahead.

Saket Kalia – JP Morgan

Hi guys. Thanks for taking my questions here. Scott, I think you mentioned that some categories within Display Imaging grew nicely, notably e-readers. Apologies if I missed it, but did you say how Display Imaging did as a whole in the quarter year-over-year?

Scott Landers

I’m sorry, Saket, your phone broke up at the end.

Saket Kalia – JP Morgan

Sorry. Did you mention how Display Imaging did as a whole in the quarter year-over-year?

Doug Shaw

How did Display Imaging do...

Scott Landers

Year-on-year?

Doug Shaw

Year-on-year.

Scott Landers

Yeah. So we did – again, I think we broke it out in relation to some of those specific device categories that did real well. We did see growth in that business, but we didn’t – we weren’t any more specific than that.

Doug Shaw

Yeah. I think for the year it was definitely double-digit, but because of the tough compare...

Saket Kalia – JP Morgan

Right.

Doug Shaw

It was mid to high single digits, and that’s why it totaled 2% OEM growth.

Saket Kalia – JP Morgan

Got it. Okay. And then looking to the balance sheet, it’s been steady $10 million debt pay-down per quarter. Do you expect that to continue going into 2013?

Scott Landers

Today, we’re left with – I think it’s $22 million in debt. So, we would continue to evaluate it every quarter based on acquisitions that could be in the pipeline, but as you think from our history, it’s been about $10 million a quarter.

Saket Kalia – JP Morgan

Got it. And can you speak about any M&A opportunities out there that may be interesting?

Doug Shaw

It really is to kind of use the same strategy we’ve been using for the last couple of years is, where is our largest growth opportunities, that things like web fonts, we think work flow is interesting, the auto market and where can we add more to our portfolio, what can we give our sales folks and our engineers more to offer to the same customers, and then of course there’s always the font industry, people that we pay royalties today who may decide that it’s in their best interest to join us. So I’d say, those kind of tuck-in approaches are what we’re continuing to look at.

Saket Kalia – JP Morgan

Got it. And then lastly on the web fonts business, you said you’d about 15% penetration. So just to clarify, is that 15% of all websites or is it of a certain subset like a Fortune 1000 or 100?

Doug Shaw

Yeah, so – I’m glad you asked. So, we have this independent company we work with who actually canvases the top 1 billion sites around the world from a traffic standpoint, and what they look for is usage of anybody’s web font service, so not just ours. And so what we’re learning is that, it might be little less than 15%, 13% somewhere in there, of all of those website use anybody. And now what we believe will happen is when it reaches that 15%, maybe 20% level, then marketing folks will tell you, you start hitting some pretty nice inflection points as far as growth. So – but that’s not just us, that’s the market in total.

Saket Kalia – JP Morgan

Got it. All right, that’s it from my side. Thanks.

Doug Shaw

Thanks.

Operator

Thank you. There are no further questions at this time. I will turn it back over to Mr. Shaw for any closing remarks.

Doug Shaw

Okay. Well, thank you for joining us today and we appreciate your continued support of Monotype. In summary, Monotype had an excellent fourth quarter and full year. 2012 was a year of innovation and accomplishments as we successfully executed against our strategic priorities. We’re looking for more of the same in 2013. Thanks, and take care.

Operator

Ladies and gentlemen, this does conclude the conference call. You may now disconnect and thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Monotype Imaging Holdings' CEO Discusses Q4 2012 Earnings Results - Earnings Call Transcript
This Transcript
All Transcripts