Monotype Imaging Holdings Inc. (NASDAQ:TYPE)
B. Riley & Co. Investor Conference Call
May 22, 2013 12:30 PM ET
Doug Shaw - CEO
Scott Landers - CFO
All right, we’ll get started with our next presentation today. Presenting for Monotype Imaging will be Doug Shaw, CEO; Scott Landers, CFO.
Good morning again. My name is Doug Shaw. I am the CEO and President of Monotype Imaging. And for those who are not familiar with the company; we are in a unique business. So what we do is we take a piece of artwork, a typeface, wrap our imaging technologies around it, and then license it to OEMs and end-users.
You use our products every day. So when you read a newspaper or magazine or view text on your TV, PC, or mobile device, chances are you are using our products. We have been at this for a while. We started the business back in the mid 80s. In fact, some of the typefaces in our library date back over 100 years. Typeface libraries comprise of some of the most popular designs in the world typefaces like Arial, Times New Roman, Helvetica, and we support virtually all of the world’s languages.
350 employees in 10 countries, long-term customer relationships, and at our last earnings call, the mid-point of our 2013 guidance came in at $167 million revenue and $71 million in EBITDA. Both of those represent a 11% increase from the prior year.
So, our software has been deployed across a wide range of consumer electronic devices ranging from laser printers, e-books, tablets, really anything that has a screen that wants to image text, worldwide text is a candidate for our software. We also license typefaces, the business in creative professionals through various distribution channels, almost popular of which are our e-commerce websites.
Kind of the secret to our business, our unique value proposition is that we are one of the very few companies in the world that can offer the type, technology, and expertise to connect all those people that are creating content to all those devices that are consuming content. And finally, we have a well established business model where we receive per-unit royalties in the OEM side, and a combination of fixed and subscription pricing in support of our end-user customers.
We divide the business into three major chunks; printer imaging, display imaging, and creative professional. Our printer imaging business is our most mature business. It grows at about 3% to 5% a year. We've seen that for the last couple of years and are seeing it into this year. It’s the other two businesses that are growing at healthy double-digit rates.
So, what I am going to do now is give you a quick update on our overview of the three businesses and the growth drivers in each. Nine out of the top ten laser printer manufacturers ship our fonts and font technologies.
Our embedded software is (inaudible) printing standards and ensures document portability and compatibility. In addition to the resident font set that ships within all these laser printers, we also offer things like page description languages, drivers. We have software that helps facilitate printing for mobile devices, and I would say within this space, the biggest growth opportunity is capitalizing and shipment of laser printers to emerging markets namely in China. So the unit shipments into China are growing at double-digit rate, and we are riding that wave.
Ten out of the top 12 mobile manufacturers also ship our software. As I mentioned earlier, anything that has a display, be it an automobile screen, may be a TV, e-book reader, or laptop, billboard at a baseball game, if they want to show text on that screen, worldwide text is a candidate for our software.
The way to grow this business is all about new account acquisitions, and once we land those accounts it can be spread out, so move across their product lines. The other way is really to capitalize on new device categories. Last year, we saw real nice uptick in things like e-books, tablets, and automotive displays. These are markets that we signed contracts, two or three years ago and now start to see the benefits of them.
Our third business and likely our largest business in 2013 is Creative Professional. This is where we license fonts to end users for both print and web-based design. The biggest growth opportunity within this business is on web design. So kind of ironically about 2, 2.5-years ago, if you are a web designer and you wanted to use type, you were dramatically limited as far as the number of typefaces because of incompatibilies across the various browsers.
Well those days are over with now all these standards that have come out, and where we are today is we offer tens of thousands of fonts to web designers. It is 75% of this revenue is a subscription based kind of business, and in 2011, I think we did $1 million. Last year, it was $5 million. This year, we're going to do more than $10 million. We're really at the investing stages of web design when it comes to fonts. So it's on a really nice slope and we expect this to continue.
The key asset that the company offers is our typeface library. So, through internal development, acquisitions, and third party agreements, we've been able to amass we think one of the world's most popular and largest typeface libraries. The key to this is that we add our imaging technologies on top of this library and then license it to OEMs.
Another important point to make is that, unlike patents, which normally have a certain amount of -- or always have a certain amount of years attached to them, trademarks, in this case typeface trademarks are perpetual. So, if an OEM or end user wants to typeface Helvetica, Monotype or one of our distributors would be the only source.
So, what we do is, we take this core asset, this typeface library, wrap our imaging technology around it and then license it. About 40% of our employees are engineers and the kind of technologies they develop around our type library are listed on the slide. In support of display imaging, we have a technology called iType, which creates high quality digital text for screens. On the printer side, UFST creates the same kind of output, but for printed output.
We have FontExplorer X, which is a very popular font management utility, and on the website design platform, we have products like our Webfont Services and Typecast application. So again it's all about this core asset type library, value add software on top of it.
We have world class customers across all the sectors that we support. On the print imaging side, we work with companies like HP, Lexmark, Xerox, Canon, Ricoh, Kyocera. On the display imaging side, we're working with companies like Microsoft, Google, Apple, Samsung, Amazon. And then when it comes to our Creative Professional business, we have tens of thousands, if not hundreds of thousands of small little designers, shouldn't call little, small designers that license our fonts for desktop and for web design.
We also work with many large corporations, companies like Gannett Newspapers, Pearsons, Hilton, Nike, really anybody who wants a nice look and feel to their electronic and print output. So, really happy with this customer base we've developed over the years. So what I'm going to do now before I cough one more time, I'm going to turn it over to Scott, and he will give you an update on the financial side. Thanks.
It's something to do with the 7-hour flight, you know I've been on that last night. Thanks Doug and good morning, I'm going to take a few minutes and review our financials and our business model. If we take a look at our highlights, we're coming off a record year last year and a record first quarter. Our goal is to drive double-digit organic growth, add complementary acquisitions, and continue to drive EBITDA margins of 40% plus, and that's exactly what we've done.
So, if you look at 2012 revenues of almost a $150 million, that was up 22%. So that was double-digit organic growth and then the acquisition of Bitstream, which we did back in March of 2012. We grew EBITDA by 18% to $62 million or a 43% margin. It was nice to see that non GAAP EPS number break the $1 mark and that was up 20%. And then if you noticed at all, those strong EBITDA margins translate to great cash flow. So in a $150 million revenue stream, we generated $50 million in cash.
So we did more of the same in the first quarter. So we grew 22%. That was 10%ish organic and then we had the one rollover quarter from Bitstream for this year. EBITDA grew 29% for 44% margin and non-GAAP EPS was up 36%, and we also generated $7 million in cash.
So over the last 18 months, some other highlights from our business. From the creative professional side, the Bitstream acquisition brought us the MyFonts website, which was really targeted towards the casual creative. So, that was the world's most popular font website. So with that in our arsenal, we now have the most robust E-commerce offering out there in the marketplace.
Doug talked about how Web Fonts which was zero for us a few years ago will be over $10 million this year, and we're excited about the future of that offering, and we will spend more and more of our time focused on the creative work flow and how can we do more than just fonts for these creators.
Our display imaging business has been a great growth factor over the past couple of years. It's doubled to $40 million. In 2012 it was $20 million back in 2010. Our printer imaging business which most people thought was declining continues to grow and as Doug noted we're seeing that low to mid-single growth and it's coming from emerging markets, places like China, India and Brazil.
And again, what's unique from us from a financial perspective is this cash flow. So we can go and do in the acquisition like Bitstream. That brings us close to a $20 million annualized revenue stream, pay 50 million and pay for that within 12 months. So it’s a real competitive advantage for us.
The other thing we did is now that we're debt free, I am happy to say that we will be debt free by the end of June. We had some debt on our balance sheet from the original curve out. As we work that debt down what else can we do with this cash and we started returning it to shareholders. So in 2012, we implemented a dividend program and in six months then we increased that dividend by 50% and now its $0.06 per share per quarter.
So taking a look at the business model, we are very proud of what we built here at Monotype and as Doug noted at its core it's very defensible. So Doug you did a great job strategically adding those trade mark font IP around our technology and again our font library is unrivaled in the marketplace.
We're also now very well diversified, whether it be by business, by geography or by their customer base. You will see on the next slide that about 85% of our revenues is either recurring or highly predictable and lastly we have a proven track record of growing the business in growing it profitably.
So if you take a look at sources of revenue from a recurring standpoint, our OEM business gives us a really solid foundation. So about two thirds of our revenue comes from those OEM per unit royalties, a little bit from licenses, renewable term licenses and maintenance.
What we liked is that our creative professional business, traditionally when we were selling to the desktop, it was all a perpetual model. What's nice as we served up the fonts to the creative world to be used on the web, that's predominantly SAS? So going forward in the future we should be building more and more of our recurring revenue streams.
The other nice part is that we've got a large chunk of our business, while it's not contractually recurring, it's highly predictable. And our E commerce site, we do hundreds or thousands of $20 transactions, those are not economically sensitive, there is a lot of analytics. So going into a given fiscal year, going into a quarter we've got a pretty good sense of what those businesses are going to do.
And then we’ve got some really nice services, run rate business from our ISV (ph) customers like Google and Microsoft. So you roll all that up, it's about 85% recurring and predictable which really helps us plan the business forecast and then go and deploy resources into the future.
So if we take a look at revenues, again the reminders, our goal is to grow double digit organically, 10% give or take, do smart tuck in acquisitions to get to 15 or 20 and that's what we've done. So if you look backwards from 2008, you will see the 15% CAGR, that was driven primarily by the growth in the printer business and establishing a CP business.
We consider 2009 a re-start. So we'll take the mulligan like most other companies for coming out of that, we've grown the business 15% a year, again about double digit organic and then tuck in acquisitions. What's nice is that from 2009 and beyond, our growth has come from those new growth drivers. So those changes in how people consume content on screens is driving our revenue.
There is changes now on how people are creating content to get to the screens is driving our revenue and again we've got the foundation of the printer business which continues to grow marginally and provide great cash flow for the company. And finally, you can see that 2013, that's the midpoint of our guidance of a $167 million. So we're long ways away from where we were in 2009 at 94.
Now if you look at EBITDA we have been just as consistent. So again we are driving these mid-40s margins and that’s where we think we are unique. This isn’t a margin expansion play, but we think there are very few companies who can deliver 42% to 45% EBITDA margins and grow the topline 10% organically and again that’s what we have done.
And I think what’s most impressive and is probably what alleviated and a lot of concern of risk is that we continue to drive those margins, even as printer is now less than 40% of revenue. A big concern in the early days as to going public was gosh, as printer declines as a percentage of revenue and these growth factors increase, how can you keep these margins, it can't possibly be as profitable?
Well they are. Because at the core what we are doing is we are taking this front IP that we own, wrapping technology around it so it can be used by the next medium. So we are leveraging that same core set of IP. And again for this year it will be $71 million as the midpoint of our guidance towards the end of the year.
If you look at net income in non-GAAP EPS, so the early days this was a de levering story as well as operating executions. So that’s what we have seen. We are outpacing revenue growth. So the 23% net income CAGR, again well over $1 now and again, now we are debt free. So this feels really good and long ways away from where we were back at the IPO.
From a cash flow perspective, so goes EBITDA, so goes cash flow. We are not a capital intensive business so we convert the vast majority of our cash flows from operations over to free cash flow and now we look at it differently and we are confident enough to share this with shareholders. So as we look at our free cash flow, we plan on using up to 25% of that to return to shareholders.
So currently with the dividend that we have in place today, we are using about 16% or 17% of their free cash flow via the dividend. As we rid ourselves of the debt and build a bigger cash balance, we may think about buybacks doing those opportunistically. There is no plan in place today, but that’s another opportunity for us.
And as we battle-tested this, this is not because we don’t think we can grow. We think this because we are unique and just how profitable we are. So we think that 75% of free cash flow to be used for M&A or reinvest back into the business is more than enough.
And again as we tested and we assumed we would do twice as much on the M&A front that we have done before and this model still works for us. So we are very happy to bring this to the shareholder base.
So in closing, our goals and outlook is really to do more the same. We don’t oversell the story here. We like where we are. We are comfortable in our own skin and its taking this core IP and bringing it to a whole new set of customer. So it’s double digit organic revenue growth. We will continue to do tuck in acquisitions that make sense.
Our acquisitions look a little bit different today. So the pipeline where it used to be the majority of our font companies, now this may be a quarter to a third of font type companies and the rest are more workflow type tools. And how can we bring better tools to the creative professionals to ultimately help their workflow and bolster our web font offering to the marketplace.
We are not interested in breaking our model which is why we put in there the net adjusted EBITDA margins begin with a 4. Shareholders ask that when can margins expand, when can 43 go to 47 or 45, go to 48? For us it’s going to re-drive organic revenue growth in the teens. So 12, 13, 14, 15 as when you can typically see that EBITDA margin expand.
And under any scenario, what we were interested in doing is building upon this great base of recurring revenue, continuing to drive strong cash flow and ultimately over time our intension is to increase their dividend. So again that’s what we have as far as prepared remarks. Again I like the business that we've built and we are happy to answer more questions to give you more insight.
Last (inaudible) Google was kind of entering the font market, and there is a little bit of fear that (inaudible) fonts, and second on that internet (inaudible), that sounded like that could be a huge business for you guys. I am just getting some numbers around it, but just where are you and where could it go and what have you learned from it?
So Google has an incentive for people to use live text [skill] (ph) for fonts because if you use graphics on the website, you can’t do a keyword search. So Google offers, actually the world’s most popular web font services, and a handful of fonts from us, a lot from other suppliers. And we actually have licensed to Google some technologies, some compression technologies as well as some ways to install fonts. What we have got in return for that is they are sending a lot of traffic to our sites.
So if you go up Google’s web font service, and say boy the font I’m looking for Helvetica is not here or Arial or whatever, if you type it in, they say hey buddies in Boston have it, and they send it over to our site.
So, we’re using Google as a really nice way to generate pay web font services. So Google probably does about four times as much traffic as we do frankly. We do probably about four times more than anybody else when it comes to pay. So, they are our partner, and at the bottom of the pyramid, people will use Google, as you move up, a lot of them use us.
I’ll just add to that. So as far as the size of the opportunity we talked about it being $10 million plus this year, a majority of that is SAAS based. We go out and do this web crawler, it looks as though the market is about 15% to 20% penetrated, so this is how many websites are doing it the new way versus doing it the old way where they would just use the font on your desktop.
So our hope is that the website portion of this business could be about $50 million, and so if we’re doing 10 at about 15% to 20% penetration, it looks like that model is holding and our value prop is working within the marketplace. What’s interesting for us is that we think websites could be just the beginning, because from an impression standpoint and what we see on screens, mobile advertising is much more significant.
And so, one of the things we’ve learned is nothing happened in the web world until a standard was established by the W3C in 2009, and that’s when Monotype and Google and the rest came out with their offerings.
The first standard for mobile advertising using HTML5 I believe just came out about 10 days ago from the IAB, and of course in those standards they talk about the use of photos and videos but they also talk about text, and they talk about using live web fonts now within mobile ads for HTML5. So that is a really interesting opportunity for us. We’re not quite quantifying it yet. At our Analyst Day, I think our GM Chris Roberts talked about it would be a multiplier of certainly from an impression standpoint. So, we’re hopeful that that same value prop we bring will hold and that could be a significant add on for us as we look out two, three, four years into the business.
Churn rate on web funds?
Yes, so we haven’t published that number. I can tell you that it’s very high. So, if you think about -- well it’s probably different by class of customers. So, where we deal with the professional creator, if you were Nike or Hyundai, you’re choosing our fonts because they represent their brand. So, that’s likely not going churn unless they wanted to forget the integrity of their brand or they change their brand to somebody else’s font. So, the attach rate is really high, and that’s where the majority of the money comes from.
When you get into our free accounts or maybe our accounts that are $10 a month, it could have I’ll call it normal churn. It's still significant amount of stick rate but you will have some that turn over, because you’re local, literally they may just discontinue the site or you know they may just choose another look and feel.
I would say that about 75% of the revenue is to the higher end of the market, 25% to the lower end. The way we charge for the product it’s per page view. So if Hilton is one of our customers, so every time somebody goes up to Hilton’s website to do online reservations, every time their page is downloaded, there is a micropayment that goes to Monotype. So, it’s a per viewing kind of model. Majority of the revenue, let's say 70% or 75% is from those higher-end customers.
(Inaudible) just wondering if you are levered to any particular manufacturing test devices (inaudible) expectations for this year, perhaps (inaudible) ?
Yes, I mentioned in the opening comments, the ones that are on a really nice growth pattern; I'll back up. Mobile we've been doing for a while. So that’s a slower growth business frankly. Where we’re seeing really nice growth is things like eBooks, tablets, TVs and auto. So all four of those are on nice path.
On the auto side its brand new opportunity for us I mean. We’ve been signing them up for a while and Ford Motors actually the led way. So if you just kind of clue into lot of the TV ads you’ll see now there is kind of iPad like experience but in your car. So the whole dashboard is going to from analog to digital. People want the ability to localize. So I want to push a button, have it go from English to French or to Japanese or whatever. Think about all different cluster displays, think about the infotainments systems behind you.
So this whole auto market, there is 80 million cars that ship a year. I would say we have contacts with over 50% of the major players in this market. Now some of these are niche products they haven’t spread across their product lines. But I would say this is in display imaging base our biggest opportunity of auto displays.
The next one would TVs. So we have nice contracts with people like Cisco, Samsung, some of the set-top box folks and if the TV ever does become kind of the gateway to your home or people start reading email or surfing the web on your high def TV that’s great for us because now its text intensive. So that hasn’t happened yet but we do think it will become a little bit more of a typical use case. We'll ride that. So auto TVs.
So Adobe is one of our top-10 customers. They pay us some nice royalties. If you look at their traditional business, their post-script product they actually have similar fonts there. If you look at the Adobe Type Library, I am going to guess it is like 70% to 80% of those fonts are us. We have given Adobe the rights to-date to take a collection of our web fonts and offer it those customers not our whole offering but overtime we want to further the Adobe relationship. Creative Claw is getting a lot of success. So how do we add value there and get into that customer base, so important partner and some nice contracts that were signed offlate.
I think someone is up next, thank you very much for your interest.
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