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Monotype Imaging Holdings, Inc. (NASDAQ:TYPE)

Q4 2008 Earnings Call

March 03, 2009, 08:30 am ET

Executives

Mike Kern - IR

Doug Shaw - President and CEO

Scott Landers - SVP and CFO

Analysts

Richard Davis - Needham & Company

Sterling Auty - JP Morgan

Ross Macmillan - Jefferies & Company

Ralph Schackart - William Blair & Company

Operator

Welcome to the Monotype Imaging Fourth Quarter and Full Year 2008 Conference Call at 3rd of March 2009. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

I will now hand the conference over to Mike Kern. Please go ahead, sir.

Michael Kern

Thank you, and good morning, everyone. Thank you for joining us for Monotype Imaging's fourth quarter and full fiscal year financial 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 would like to remind everyone that matters we are discussing today and the information contained in the press release issued by the company earlier this morning announcing our fourth quarter and full fiscal year 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, March 3, 2009. 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 earnings 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 would 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 stock-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, net adjusted EBITDA not found in our press release can be found on our website, along with a link to today's call under the Events & Presentations in the Investor Relations section of our website at www.monotypeimaging.com. Both the call and the supplemental financial information will be archived on our website for one year.

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

Doug Shaw

Hello and thank you for joining us this morning. Monotype Imaging delivered a solid fourth quarter performance considering the challenges presented by the economic downturn.

We generated solid profitability in cash flow, in both the fourth quarter and the full-year 2008, which was a direct result of our strong market position and our attractive business model. In addition, we ended the year with a strong balance sheet that was further enhanced by growing cash balances and reduced debt.

I will begin with highlights of our financial performance and I will discuss the progress we made on our strategic initiative for delivering long-term growth. I will also describe how we are planning to manage our business in 2009.

First, let's took at our financial performance for the fourth quarter and then the full year. Total revenue in the quarter was $27.4 million, down 1% compared to the fourth quarter of last year.

Our focus on expense controls enabled the company to deliver $13.7 million in net adjusted EBITDA, a 8% increase over the fourth quarter of 2007. Net adjusted EBITDA excludes secondary offering expenses, severance and net losses on our inter-company loan and interest rate swap. This led to a net adjusted EBITDA margin of 50% for the quarter.

Turning to our full year results, revenue for 2008 was $110.9 million, up 5% compared to 2007 in consistent with the guidance we provided on our last call. Net adjusted EBITDA was $50.7 million, up 7% over 2007, which resulted in a net adjusted EBITDA margin of 46% for the full year. This was at the high end of the range we provided on our last call.

Looking at our OEM performance, revenue for the fourth quarter grew 5% year-over-year to $20.1 million, while it grew 7% to $77.8 million for the full year. Growth in the fourth quarter was led by mobile phones and other consumer device categories as well as our printer driver technologies.

The growth rates of our traditional laser printer business declined year-over-year in the fourth quarter. We recognize this revenue in rears, so our results reflect the more challenging selling in environment, which began in the third quarter and has continued into 2009.

Our Creative Professional revenues declined during the fourth quarter, 14% year-over-year to $7.3 million that grew 2% to $33.1 million for the full year 2008. In the fourth quarter, Creative Professional experienced softness across all channels including our e-commerce business.

It is fair to say that the second half of 2008 was a challenge. With that said, we are proud of the significant progress made towards the company's strategic long-term initiative. These include broadening our products offerings, tracing our reach to new and existing accounts in device categories and enhancing our e-commerce offering.

We also spent significant time identifying ways to improve the company's efficiency, while enabling us to increase investments and growth opportunities without expanding our costs base.

When we began 2008, industries such as mobile phones docking scaleable fonts, transitioning to scalable from bitmap technology, or recognizing the need to do so. We offered fonts in font technology that those require. But today, our solution is even more flexible and robust with new products like Edge Technology, which enable typographic style and legibility in a small memory footprint.

Another example of our expanding product base is our FlipFont application, which allows users of certain mobile devices to personalize them with fonts. We believe our expanding array of products will continue to set us apart and help us to maintain and extend our early leadership position as the various consumer electronic industries evolve.

We announced important new mobile customers in 2008, including Shark Corporation of Japan and Verizon Wireless. We also signed HTC of Taiwan who licensed our Helvetica font for the Touch Diamond Smart Phone.

Outside of mobile phones, we announced agreements with Garmin and OpenTV. On the printer side of our business, we continue to enhance our technologies. We released version 6.0 of our Universal Font Scaling Technology, our main stay solutions for printers.

UFST 6.0 allows OEMs to more easily display multi-lingual text on LCD panels while ensuring high quality printed output. We also expanded our line up of printer driver kit and we added support for Microsoft XPS page scripting language which is part of it.

On a Creative Professional side, we added French, Spanish and Germen versions of Fonts.com to reach an expanding base of international customers. We also added over 20,000 new typefaces to our online stores.

As we close up the year, we released a dual lineup of font management products based on our popular FontExplorer X application. Launched at Macworld in San Francisco a new pro and server additions catered to the font management needs of creative professionals and network administrators.

These users require the ability to manage and organize their fonts, which can run into the thousands. Among many features FontExplorer X for a larger to turn on only selected fonts for use of applications like Quark XPress and a Adobe Creative Suite.

You can also experiment with fonts from our online store. FontExplorer X Server comes bundled with more then 4,000 fonts from our linotype, monotype and ITC’s libraries. FontExplorer X Server is sold on an annual subscription basis, a new reoccurring revenue model for the Creative Professional side of our business.

Initial feedback on the new products has been excellent, and we expect to gain market share overtime. Looking ahead into 2009, we are planning to make targeted investments in our growth initiative. The key area of focus for us is in Asia, where we recently opened an office in Korea. We also added personnel with deep industry expertise to support our Japanese, Chinese and Korean customers.

We believe that our local presence in these areas, combined with advanced technologies and world language fonts provides a unique comparative strength. We will continue to enhance products like Edge Technology, which generates high-quality text on low resolution screen, while maximizing performance and minimizing memory requirement.

We are also focused on device personalization with products like FlipFont. In 2009, our goal was to find additional operators and handset manufacturers, and we expect to increase the font selection available for downloading to mobile font.

As we evolve our products and add support for additional platforms to attract new customers, we will concentrate on expanding our offerings across different device categories and reaching further into existing account.

For example, our mobile design wins have traditionally involved smart phones, but we are also targeting the lower end of the cell phone market, as demand for scalable type increases.

Thanks to the flexibility of our solution, we are able to address the varying requirements from the high-end to the low-end, enabling OEMs to integrate scalable technology across their full range of products.

Turning to 2009, given the challenges with respect to annual visibility, we have decided to adjust our guidance philosophy for the near-term. In doing so, we will provide next quarter's guidance as that is the timeframe that we have the best level of visibility. When the economic environment stabilizes, we intend to resume our practice of providing only full year guidance.

Scott will provide more detail in a moment. But from a high level perspective, for the first quarter of 2009, we are targeting total revenue in the range of $23 million to $23.5 million, adjusted EBITDA of $8.5 million to $9 million with an adjusted EBITDA margin of approximately 38%.

While we are not providing specific full year guidance at this time, we would like to share how the economy is affecting our businesses, while we are managing our expenses in cash, our comfort level of servicing our debt and our ongoing intention of pursuing selective growth opportunities.

Starting with the printer OEM business, as of December 2008, which is the last time the numbers were updated, a leading industry analyst predicted 2009 laser printer unit market decline of 2%. While our recent conversations with our customers have led us to believe the market is declining faster, we believe we could see declines in our printer OEM business of approximately 10% to 20% year-over-year.

Our other OEM businesses should continue to grow in 2009. We still believe, we are well-positioned to continue adding new customers and extending our reach within existing accounts.

We are in the early stages of these developing markets and see opportunity ahead. As for Creative Professional, we expect all of our distribution channels to continue experiencing a degree of pressure.

We have greater visibility into our expenses and are currently plan to run the business with an EBITDA margin in the mid-to-high 30% range for full year 2009. This will be done by continuing to balance expense management and to reinvest and support of the growth initiatives we have outlined.

Importantly, we are comfortable that we can effectively manage and service our debt to combination of expense management and cash flow generation. In addition, we have the flexibility to use some of our cash balance to pay down additional debt if we determine it is appropriate to do so.

We ended 2008 with approximately $32 million in cash, we generated $30.5 million in free cash flow during 2008 and we expect to continue generating meaningful cash flow in 2009.

In summary, the company delivered a strong performance in 2008. As we look to 2009, we will continue to focus on our strategic initiatives to position the company for enhanced growth when the economy improves.

We are confident in the company's long-term prospects as a result of our market-leading position, attractive business model that drives significant cash flow and profitability and our strong balance sheet.

At this point, I will like to turn the call over to Scott.

Scott Landers

Thank you, Doug, and Good morning everyone. I would like to start by reviewing Monotype Imaging financial performance, first on a quarterly basis and then for the full year. I will also highlight some of the steps we have taken to strengthen our financial position, and then provide you with more detail on our outlook for fiscal year 2009.

Revenue for the fourth quarter was $27.4 million, down 1% compared to the prior year. Revenue for the quarter increased approximately 2% on a constant currency basis. Our OEM revenue was $20.1 million, up 5% over the $19.1 million we recorded in the fourth quarter of 2007.

The OEM revenue growth was driven by increased penetration in mobile phones, digital cameras and personal navigation devices, mostly in existing account as well as design wins related to our printer driver business.

As Doug mentioned, our traditional laser printer business declined as we market conditions worsen. Our Creative Professional revenue was $7.3 million, down 14% compared to the prior year. As we stated in previous calls, this business has been more sensitive to the deteriorating economy.

In the fourth quarter, we saw weakness across all sectors of the business including ecommerce. On a constant currency basis, Creative Professional revenues declined approximately 5% versus the prior year. A large portion of our CP business comes from subsidiaries in the UK and Germany with the weakening pound and euro had a impact on consolidated revenues from those businesses.

Gross profit margins for the quarter excluding the amortization of acquired technology was 94% of sales and consistent with the prior year fourth quarter. We saw 350 basis point improvement over our third quarter due to sales of higher margin fonts in our CP business as well as overall revenue mix.

Operating expenses including amortization totaled $15.1 million during the fourth quarter, representing $1.2 million, or 8% decrease from the prior year. Excluding severance related to our restructuring effort, operating expenses declined $1.9 million.

Decline was due to reduced variable compensation, operating expense savings related to our restructuring, the impact of foreign exchange rate as well as reduced amortization of intangible asset.

Operating margins for the fourth quarter was 36%, 4 percentage point improvement over the fourth quarter 2007. The improvement was mainly due to our lower operating expenses.

Other expenses were $3.1 million, which included expenses of $1.2 million related to our inter-company loan and the interest rate swap on our debt. The vast majority of this expense was non-cash.

We remain focused on paying down our debt and reducing interest expense. And in late November, we entered into a two-year interest rate swap covering a major portion of our long-term debt.

Swap fixed our interest at historically low rate, and over the next two years, we expect to see real cash interest savings as a result of this swap. However, over the same period we will experience non-cash mark-to-market gains and losses as interest rates fluctuate.

Net income for the fourth quarter was $4.1 million, a slight increase compared to the $4 million we recorded in the prior year. On a per share basis, we generated earnings of $0.12 per diluted share compared with earnings of $0.11 in the fourth quarter of 2007.

Adjusted EBITDA for the quarter was $11.8 million, compared to $13.5 million reported in the prior year. Adjusted EBITDA margin for the quarter was 43.1% versus 48.9% last year.

Our adjusted EBITDA calculation for the quarter includes $1.2 million of net expense related to our inter-company loan and interest rate swap as well as severance charges of approximately $700,000 related to the restructuring we implemented in November. Excluding these items, net adjusted EBITDA was $13.7 million, an 8% increase over the fourth quarter of 2007 and led to a net adjusted EBITDA margin of 50% for the quarter.

Now turning to our full-year results, total revenue for fiscal year 2008 was a $110.9 million, up 5% compared to 2007 and consistent with the guidance that we provided on the last earnings call.

OEM revenue was $77.8 million, an increase of 7% for the full year. Creative Professional revenue was $33.1 million and grew 2% compared to 2007.

Gross margin for 2008 was 89% and operating margin was 31% both flat compared to the prior year. Diluted earnings per share $0.44 compared to an earnings loss of $1.55 in 2007 which included approximately $34 million with the accretion of redeemable preferred stock which we did not have in 2008.

Adjusted EBITDA for the full year was $48.3 million an increase of $1 million compared to the prior year. Our adjusted EBITDA margin for the full year 2008 was 43.6% versus 45% last year.

Adjusted EBITDA for the full year 2008 includes $700,000 in severance charges related to our restructuring. $1.2 million in secondary operating expenses, $500,000 in primarily non-cash expenses related to our inter company node and interest rate swap.

Net adjusted EBITDA excluding these items was $50.7 million representing a 45.7% margin and a 7% increase versus the prior year.

Cash flow from operations for 2008 was $30.5 million an increase of 12% compared to the $27.3 million we generated in 2007. The delevering of our balance sheet and the associated reduction in interest expense enabled us to grow cash flow at a rate faster than revenue.

Cash and cash equivalents as of December 31, 2008 so that $31.9 million a $12.4 million increase over the prior year. Total debt outstanding at the end of the year was $113.6 million which was down $17.8 million from $131.4 million at the end of 2007. We remained focused on paying down our debt and later this month we will make a contractual call back payment of approximately $7.4 million.

In total, we will repay approximately $10 million in debt in the first quarter of 2009. We are also scheduled to pay down approximately $18 million in total debt in 2009 which will further reduce our interest expense going forward.

Now turning to our outlook, for the first quarter of 2009 we expect total revenue of $23 million to $23.5 million gross margins including amortization of acquired technology to be approximately 87% and operating expenses to be in the range of $15.2 million to $15.6 million.

We expect adjusted EBITDA to be in the range of $8.5 million to $9 million for a margin of approximately 38%. Finally we anticipate EPS of $0.05 to $0.07 per share.

Our adjusted EBITDA and EPS guidance includes the impact of any non-cash charges related to our inter company note and interest rate swap.

Typically Q1 revenue is our lowest revenue quarter of the year because of OEM customer payments that are scheduled in Q2, 3 and 4 but not Q1. These payments account for approximately $5 million to $7 million in total revenue.

With that said the printer units selling trends in the first quarter are lower than the fourth quarter level and as Doug, mentioned our planning assumes laser printer units could decline 10% to 20% year-over-year. This potential decline could offset the majority and potentially all of the sequential benefit we usually receive in the second quarter as a result of the payments mentioned earlier.

When we look at our Creative Professional business for the first quarter; we expect revenue could decline from $6 million to $6.5 million. At these levels it appears that this business is leveling on.

While we are not providing full-year 2009 guidance, I wanted to provide you with some more details around how we are looking at the business, typically as it relates to expense management, our balance sheet and debt.

First our expense assumptions, balance cost containment with investment and support of our growth initiatives. As you will remember in November of 2008 we implemented a restructuring program in order to invest in the business without meaningfully impacting our cost structure.

These actions resulted in approximately $4 million of identified cost savings. Approximately half of the $4 million savings is being reinvested in areas like the opening of our Korean office and the launch of new products such as FontExplorer X and FlipFont.

We also expect to realize expense savings of approximately 5% year-over-year due to decreases in variable compensation and ongoing cost containment initiative. We believe these savings should enable us to meet our mid to high 30% adjusted EBITDA goals.

In addition we are confident in our ability to continue servicing our debt through a combination of expense and cash management, even if the environment remains challenging.

We are currently scheduled to pay back approximately $18 million in debt during 2009 and we expect to do this from our 2009 free cash flow generation. We also have the flexibility to use a portion of our $32 million cash balance to pay down additional debt in order to appropriately manage our capital structure.

At this time we have not decided whether or not we will prepay any debt, but we wanted to make it clear that our strong balance sheet and continued cash flow provides us with a number of options. And we will manage this in the best interest of our shareholder.

In closing we entered 2009 with a solid financial position and business model and we believe Monotype Imaging is well positioned to manage through the current environment.

With that we will turn the call over to the operator to begin the question-and-answer session, operator?

Question-and-Answer-Session

Operator

Thank you, sir. (Operator Instructions) Thank you. The first question comes from the line of Richard Davis from Needham & Company. Please go ahead.

Richard Davis - Needham & Company

Yes, one question first on the printer business, consumer versus business side. We have heard and our thoughts were that the consumer side was falling much more rapidly than the business side, one is that your expectations?

Doug Shaw

Richard this is Doug. 100% of our printer related revenue comes from the business side, so it's really hard for me to talk to what's going on in the consumer side. What I can say is that in Q4, what we saw was roughly a 5% decrease in units versus Q4 of the prior year. And then in our Q1, we are seeing approximately 7% to 8% decrease in units, well when we give guidance of 10% to 20% for the full year. It feels like that taking into account inputs that we are getting from industry analysts, from customers, we actually just this morning, got some more information from another industry analyst who is forecasting on the business side of laser printers, a 5% discount for the year.

But I think your general point is probably right on that the consumer printers are suffering more than business printers. But we have real data on the business side; the consumer side is really what we read in the papers.

Richard Davis - Needham & Company

And then on the debt side the coverage ratio, is it I was trying to remember I think it's three times is that that the correct number, at what level of EBITDA do you get to, where the crossover point is three times versus not three times, we kind have been in the background, but I just want to make sure our math was right?

Scott Landers

Richard, its Scott the ratio is 2.75 beginning in March and it continues at that level and it does not decrease from there. If you take our outstanding debt and what it would be at the end of the year and apply the ratios is about a $35.5 million EBITDA number.

Richard Davis - Needham & Company

That's right, okay, cool. I let some other people ask some questions, Thank you.

Operator

Thank you the next question comes from Sterling Auty from JP. Morgan, please go ahead.

Sterling Auty - JP Morgan

Yeah thanks, you may have mentioned that you felt that Creative Professionals $6.5 million level would be kind of leveling of point, what gives you confidence or just why do you believe that right kind of leveling off level of business?

Doug Shaw

Sure, in Q4 our Creative Professional business was a total of $7.3 million and end there was about $600,000 unusual orders one was back payments from the distributor and one was a unusually large side license. So if you normalize Q4 in our minds, it was a $6.7 million quarter and as Scott talked about, this quarter we are looking at roughly $6.5 million to $6 million on the Creative Professional side.

So we will only get 6 months of data, so we do not want to draw any strong conclusions in this kind of crazy environment we are living in. But it feels like its starting to plateau. We know what’s in the pipeline going in to Q2 and through the rest of the year so it feels like it starting to plateau, we need more data than 6 months to be in a really, really strong in that position.

Sterling Auty - JP Morgan

Okay and then Doug you also mentioned increasing penetration in some of your non-printer OEM customers as well as getting some new customers. Can you give us some additional color in terms of what conversation are going out, what those customers are saying and what's needed to happen to you to capture those opportunities this year?

Doug Shaw

What's nice is that, I think, you know Sterling for the longest time, we have been out there kind of evangelizing to the market, that scaleable types offer the lot of advantages. We think now, that the mobile phone market particularly understands they have a font problem, and that scalable type is only the right solution. Now, we need to convince them that we are the vendors that they should use. And the kind of conversations that we are having is particularly with in Asia is looking at their product launches, what the time frame is what's the customer functionality.

If you are going to be doing some things like searching the web, then scalable types in our minds is mandatory, if you want to be able to zoom in and out of documents that have the type look nice and crisp, in our minds, scalable type is mandatory.

It really is driven by customer functionality, and what we realize about half way through this year, it was really hard to convince customer to go with us and to support them promptly, doing it out of the US.

And. So, opening up that Korean office was important to us. What mandate was the sales, the senior sales person were above the higher, support person.

In Japan, we have already had office there we think its 15 years now, but adding more people to that office. In China, we have added a consultant. On the sale side, we already have an office in Taiwan. So, we really are making commitment as a company to get closer to the customer.

Sterling Auty - JP Morgan

Okay. And then, can you, talk about you mentioned payments to your swap agreements lost in the interest rate on the debt, how should we be thinking about the other income line in total, both, interest income at year ending, as well as what the appropriate rate across your debt we should be using for modeling purposes for the share?

Scott Landers

Great, we are locked in at about 2.19 so our blended rate on roughly 80% of the debt is just under 5% and then 20% of that will fluctuate with LIBOR plus 2.75. So we are using 5% to 5.5% on the interest expense line.

Our interest income, we have a very, very safe investment philosophy so was minimal interest there. The other kind of non-cash items that we deal with are somewhat unpredictable although we should have a pretty good hedge on our inter company note today and has been functioning much better as currencies have stabilized and we will have some potential non-cash movement on our interest rate swap that we put in place.

And those could be gains or losses based on if rates go up again. But the two main items, I think you could use consistent interest income line from last year and then on debt 5 to 5.5.

Sterling Auty - JP Morgan

Okay. Great, I will turn the call over, thanks Scott.

Operator

Thank you. The next question comes from Ross Macmillan from Jefferies. Please go ahead.

Ross Macmillan - Jefferies & Company

Thanks, I guess the first question is, Doug, I think you said laser printer unit from the OEM side were down 5% in Q4 but you put an OEM revenue number up 5%, I guess the two questions, one is can you remind us where we are in terms of mix printer versus other OEMs. And then secondly are you still seeing that price increase per unit is that going to be a continuing function as we look into '09 where typically I think your revenue on the printer side, has actually out script unit volume. Thanks.

Doug Shaw

Sure, that was a multi-part question. So, in Q4 printer units were down roughly 5% but as you know we are also in the printer driver and color business. So, when you factored that in the printer business in total was down slightly, I think it was roughly 2% or so. And our overall OEM business was up because we got some nice uptake in our non-OEM business meaning GPS devices, non-OEM printer business leading GPS devices, cell phones and devices like that. So, our goal continues to be if the printer business drops off 10% we would like to do better than that by licensing more than strict defines for that market.

And then on the non-printer OEM market it's all about account acquisition. So, can we sign up probably use that we are not working with today. As well as the ones we are working today can be spread our technology throughout, your product line.

Ross Macmillan - Jefferies & Company

And then just to go back again is kind of follow on but you mentioned that the unit volume decline on the printer side can mean that those OEM payments for the Q2, Q3, Q4 that uptake could be offset? So, are you kind of indicating that we should think about pursuing of that Q1 OEM number or how should we think about it without?

Doug Shaw

The way we are running the business or managing the business is we are looking at what happened in Q1. And seeing now we have $5 million to $7 million worth of scheduled payments for the rest of the year. And concerning that somewhat of a buffer if there is a continual decline in the printer business. So, what we see right now is $23 million, $23.5 million this quarter and typical year we would see another $2 million roughly a quarter going out.

It's a dynamic environment, so we are not sure we will realize all or any of that incremental pop. What is just so interesting about these days is we are talking to our customers of course we are just, our team of sales people return from Japan and it ranges from some OEM units be flat, some seeing a 10% decline, some are a way up 20% and now we just got this input from industry expert that they are seeing a 5% decline for the whole year.

So it just being prudent for us to say why do not, we say 10% to 20% is a comfortable decline and manage our expenses to that.

Ross Macmillan - Jefferies & Company

Okay, and then just one for Scott quickly on the gross margin side. If I look at x-items you had a nice step down in the cost of revenue sequentially in Q4, could you just highlight kind of what drove that was it FX partly or how come you got that step down in cost of sale? Thanks.

Scott Landers

Yeah, there was actually a couple of things. We had a couple pretty meaningful size deals within our Creative Professional business. That carried a very high margin based on the font mix that was sold through the customer, and probably to the tune of maybe 20 to 30 points higher than maybe typical deal. So that was one component. The other piece is that if OEM revenue is higher as a percentage of revenue than CP we should get a little bit more of an up tick on the margin just due to the overall product mix between the two lines of business.

Ross Macmillan - Jefferies & Company

Great, thank you.

Operator

Thank you. The next question comes from Ralph Schackart from William Blair. Please go ahead.

Ralph Schackart - William Blair & Company

Hey good morning guys.

Doug Shaw

Good morning.

Ralph Schackart - William Blair & Company

Doug you were kind enough to give a sort of range for printer declines for '09; I know it is tough to have a crystal ball in this environment but is it possible the printer market can be sort of down 20% to 30% plus this year is that not a likely scenario even what’s going on in the end-market?

Doug Shaw

Anything is possible, I'm shocked that we are seeing units down 5% to 8%, this has never happened before in the 20 years I have been working in this business. 20% to 30% decline well that would be pretty unprecedented, well not pretty that would be incredibly unprecedented. I know that's not what our OEMs or industry experts are telling us.

Ralph Schackart - William Blair & Company

Okay and then one other question in the way to the printer OEM business as it relates to the enterpriser business end of it, has there been any further accelerated deceleration either in MFP or any other market segments or has it been pretty much soft across the board?

Scott Landers

It’s an interesting question. It really depends upon OEM for example, a major [textual] digital copiers actually gave us their forecast and they were forecasting roughly a 5% decrease in their high-end digital copiers and they as much as 20% decreased on their low-end black and white kind of a $300 laser printers that was, that's counter intuitive to what I would have expected when we look at the royalty reports for Q4 and Q1 we have seen the high end from a unit standpoint taking more of a hit in the low end. Black and white printers are definitely dropping at a faster rate than color or multifunction but it seems like the laser printer market is definitely moving to MFPs and color just like we saw inkjet printer market two years ago.

Ralph Schackart - William Blair & Company

Okay thank you.

Scott Landers

Sure.

Operator

Thank you we have a follow up question from Sterling Auty. Please go ahead.

Sterling Auty - JP Morgan

Yeah thanks. Just couple of housekeeping, what was total headcount at the end of the quarter?

Scott Landers

We were 238. I am going to find out, but I believe its 238.

Sterling Auty - JP Morgan

Okay and you mentioned FX couple of times margin, but I did not catch it, what was the FX impact on revenue in the quarter?

Scott Landers

It was about $700,000 to $800,000. And we should know we have got a pretty good natural hedge on the operating income line at minimal. The revenues and expenses that we have denominated both pounds and euro.

Sterling Auty - JP Morgan

Okay and then kind of what if you factored in to the first quarter guidance in terms of your FX expectations?

Scott Landers

There is a comparable hedge based in probably $700,000 to $800,000 in to the Q1 number.

Sterling Auty - JP Morgan

Okay and my last question is, why would you actually buyback more debt this year, than what you require to given the environment and lots of companies are kind of holding cash of this. Other than I understand, trying to just say with you guys strong balance sheet and strong operating position. But, why would you consider seriously buying back more than what you are required to this year?

Scott Landers

Yes so I think we have taken the strategy of hoarding cash and keeping everything and we are actually proud that we are able to put $32 million on to the balance sheet. As at the end of the year, we are ultimately looking to manage this business to mid to high 30%. I think we have done what we need to do here in a short-term as for as getting cost under control and then doing more. But ultimately we need to keep our eye on this debt covenant on 2.75.

What we like is that under the various scenarios that we run at the level that we would even be close we would still be able to fund the regular debt payments from 2009 free cash flow and then we would be left with the flexibility to use that $32 million in cash to pay down more, just pick up this more coverage.

Sterling Auty - JP Morgan

Okay and thank you.

Operator

We have a follow-up question from Ross Macmillan. Please go ahead.

Ross Macmillan - Jefferies & Company

Yeah Doug, just remind us again of, how you see the royalty reports coming through and how you take the revenue given the lag effect, the extend you are talking to Q1. Do you already really know the Q1 number and so, the visibility on that is high but thereafter obviously it gets tougher? Thanks

Doug Shaw

Sure, yeah, so we get our royalties, one quarter in arrears, so shipment that happened of cell phones or printers in October, November, December will get those royalty check. Usually at the end of January, end of February. We have great visibility to what our OEM revenue is for this quarter so it is now here we are early March. That’s one of the reasons we are giving a tight range, 23 to 23.5, kind of the variables in that, is a little bit of OEMs and what's going in the Creative Professional side.

In one point this is not actually your question, Ross but I think it's important for me to make. We have seen a slow down before in some of our OEM markets like the printer market and that was in 2001, 2002 and come 2003 and '04 they were our best years ever in the printer business inkjet took off. So in our mind what will happen is we will definitely have our revenue impacted by a drop in units this year and who know if its kind of goes into next year or repent up the matter.

The great thing about printers is they break. I think there is reserve replacement market for printers. And we are absolutely given that when we look at this period over the long-term we are going to get these guys. It's just not in the, the timing we expected.

Ross Macmillan - Jefferies & Company

And just that’s an interesting point did you see, was your printer business recovery kind of consistent with them, the overall economy was there any lag or lead effect would you say when you look back to the '02 and into '03 period?

Doug Shaw

Yeah, the numbers are little rough but roughly in the I will say the '01, '02 we saw lack to 2% down as far as units in our revenue was actually up maybe 2% during that period and then in '03 and '04 I mean our revenue was up in the 20% maybe 30% category and the market did not do that. So we continued to dramatically out roll the market, but the market all by itself I think was something like 15% to high teens percent growth.

Ross Macmillan - Jefferies & Company

Great thank you.

Operator

(Operator Instructions) Thank you sir, we have no more questions, please continue.

Doug Shaw

Okay. If there are no further questions, let me briefly summarize. We were pleased with our fourth quarter and full year results as we delivered solid profitability and cash flow. Despite the difficult economy, we continue to see a significant opportunities for Monotype Imaging and believe we are well positioned for the future. Thank you all for joining us and have a good day.

Operator

Thank you. This concludes the conference call. Thank you for participating. You may now disconnect.

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Source: Monotype Imaging Holdings, Inc., Q4 2008 Earnings Call Transcript

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