Monotype Imaging Holdings Inc. Q1 2010 Earnings Call Transcript

May. 4.10 | About: Monotype Imaging (TYPE)

Monotype Imaging Holdings Inc. (NASDAQ:TYPE)

Q1 2010 Earnings Call Transcript

May 4, 2010 8:30 am ET

Executives

Staci Mortenson – IR, ICR

Doug Shaw – President and CEO

Scott Landers – SVP and CFO

Analysts

Ralph Schackart – William Blair

Steven Frankel – Brigantine Advisors

Matthew Kempler – Sidoti & Company LLC

Ross MacMillan – Jeffries & Company

Jeff Rath – Canaccord

Saket Kalia – JPMorgan

Operator

Welcome to the Monotype Imaging conference call on the 4th of May 2010. 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 Staci Mortenson. Please go ahead.

Staci Mortenson

Thank you and good morning everyone. Thank you for joining us for Monotype Imaging's first quarter 2010 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 first quarter financial results that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements, including predictions, estimates, expectations and other forward-looking statements, generally identifiable by the use of the word believes, will, 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, May 4, 2010. 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 first 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 would like to remind you that today's discussion will include references to net adjusted EBITDA, which is intended to serve as a further compliment to our results provided in accordance with generally accepted accounting principle.

A reconciliation of this non-GAAP measure can be found in our press release. In addition, a link to today's call can be found under Events & Presentation in the Investor Relations section of our website at www.monotypeimaging.com. This call 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 first quarter performance reporting total revenue of $24.5 million in net adjusted EBITDA of $10.2 million both in line with our guidance. We experience revenue growth across both our OEM and Creative Professional businesses.

We were encouraged by the strength in our traditional laser printer business was all in Creative Professional particularly on the web. The business environment is improved and looking forward, we are more positive on our outlook.

During the first quarter, we invested in growth opportunities while generating high levels of profitability in cash flow. Our debt levels decreased while cash on the balance sheet grew. Net debt is currently $45.6 million down from $56.7 million at the end of 2009.

Overall, we are pleased with our results for the first quarter. Now I'd like to provide you with highlights of our financial performance and business activities. Total revenue for the first quarter was $24.5 million, an increase of 4% year-over-year.

Our OEM performance for the first quarter was 17.6 million, an increase of 2% year-over-year. Growth was driven by higher revenue from our printed customers, and ongoing strength and our driver in color technologies.

We are also encouraged by GUI trends for the second quarter, which indicates sustainable demand. In other OEM categories were pleased with the pace of new design wins as well as our increased momentum to capitalize and expanded opportunities, such as e-books and graphically user interface.

Looking ahead, we remain encourage that as we emerge from the recession we will see an increase in deployments and unit shipments, and the other device category portion of our OEM business. Turning to the ISV segment of our business, we experienced some softness of seeing signs of improvement in the second quarter.

During the first quarter, our Creative Professional business reported $6.8 million in revenue, an increase of 8% year-over-year. This was our best Creative Professional result since the fourth quarter of 2008. Our web business experienced double digit revenue growth. This was fueled by the improvement in traditional font sales as well as FontExplorer X, our font management solution that represents a small but growing portion of our web business. We also saw average deal sizes grow to pipelines increase and closure rates improved in our direct business.

Now I would like to discuss some of the business highlights of the first quarter. We continue to focus on device categories to represent new avenues of OEM growth such as e-book readers. We signed a royalty bearing relationship with the leading e-book maker for our iType rendering technologies in addition to Latin and Asian font that are highly compressed, distinctive and style and able to display with superior quality.

This is a combination that's extremely important to our customers and why this customer chose our solution. The importance of legibility on e-readers and our belief that end users would prefer technologies was validated in a recent study.

We hired a research company which interviewed 43 potential buyers of e-books in the Boston area. Participants viewed two e-books side-by-side one using our solution and the other using an open source font solution on a commercially available e-reader. Text was displayed in English or Chinese depending on the preference of the study participants.

On average, our solution was preferred 10 to 1. Participants said they would pay materially more for device with our technologies because the text was clearer, more legible and easier to read. As we seek new growth opportunities, we also remain committed to strengthening established categories such as mobile fonts, where customers are deploying more products with our font and font technologies.

Last month, we announced an agreement with Samsung to embed our Flip Font product in the range of mobile phones expected to ship this year. We enhanced Flip Fonts to support the Android mobile platform beginning with Samsung's new Galaxy S phone. This will be the first device to include Flip Font as a built-in application with our downloadable font available from Google's Android marketplace.

Now I'd like to spend a moment on our investments in the graphical user interface market. While only a few months have passed since we acquired Planetweb, we are encouraged by an expanding pipeline for GUI Solutions across several categories such as digital cameras, consumer appliances and printers.

OEMs are recognizing that an effective and well designed GUI is an important competitive advantage; especially its hardware and operating systems become more commoditized by providing a total solution that combined GUI tools with fonts and font technologies.

We believe we are uniquely positioned at value to existing customers, and expand further into the consumer electronic industry. Turning to Creative Professional, a new era is being defined on the web. This is revolutionizing the way fonts are used online. Today I'm pleased to announce that we launched the public beta our new solution called Fonts.com Web font. This cloud-based service allows web designers, content creators, brand holders and others to access a wide range of fonts for designing web communications, such as branded sites, advertising and blogs as well as personal sites and postings.

As you are aware web publishing is on the rise. The good news is that typography choice is finally coming to the web. Well, it may seem simple the actions required to get to this point have been complex. Many stakeholders are involved including companies that make computer operating systems or internet browsers as well as Typeface boundaries in the worldwide web consortium, known at W3C which set technology standards of the web. Through progress and time, Web fonts are now a reality. Web designers no longer must deal with a frustrating trade off which meant they either had to use a handful of system fonts or imbed fonts in graphic.

Today web pages can be designed with typographic freedom and that's where we come in. As we begin the public beta of our Web fonts solution participants will be able to use over 2000 fonts. We intend to grow that number to about 7,000 by the time our web fonts solution launches commercially later this year.

Typeface will include some of the most popular print publishing fonts of all time plus the Helvetica Frutiger and Universe which will be exclusive to our web offering. Our solution supports more than 40 languages and we have a patent pending on technology that speeds the delivery of world language fonts that have large character sets such as Chinese and Japanese.

When we launch commercially, our solution will be available on a subscription basis. We'll also have a free entry level service which will make it very easy for anyone to use our Web Fonts whether the goal is to deploy printed content to an audience of billions or to stylize a family blog, our solution is geared to fit.

Fonts.com Web fonts are the latest in a long line of innovative solutions we have brought to the marketplace. Armed with a strong portfolio of font IP that allows us to offer the world the largest collection of web fonts, we believe our solution represents a promising and significant opportunity for grow.

Now I'd like to turn to Q2 and 2010 guidance. Last quarter, when we gave 2010 guidance we encouraged that our visibility had improved but we're cautious on sustainability and pace of the recovery. Now that we are further into the year and have additional insights from our OEM customers and greater level of predictability in Creative Professional we are increasing our annual outlook.

As Scott will discuss in a few minutes, we're expecting revenue and profits to grow sequentially in the second quarter and we're increasing our guidance for the full year 2010. We are now targeting annual revenue in the range of $102 million to $106 million or 9% to 13% year-over-year growth. We're expecting net adjusted EBITDA of 43% to $46 million, or approximately 43% of revenue.

On the print side of our business, our customers are planning for growth in the high single digits. We believe the strength we saw from our printer OEMs during the last two quarters will continue throughout the year. In other OEM categories we are expanded deployments with established customers and new design wins.

The integration of 0:03:01.2 Technologies into our product line allows us to bring additional value to a wide range of customers address an adjacent market where previously we had limited solutions. And on the Creative Professional of our business, for the full year, we continue to anticipate year-over-year growth. We are enthusiastic about our new Web fonts solution and its potential to strengthen our Creative Professional offerings. Overall, we believe we are well positioned to capitalize on an improving business environment. Our ongoing investment and strategic initiatives and our expanding product and customer base provides us with key long term growth opportunities.

At this point I'd like to turn the call over to Scott.

Scott Landers

Thank you Doug and good morning everyone. I'd like to start by reviewing Monotype Imaging's financial performance and then provide more detail on our outlook for the rest of the fiscal year. Revenue for the first quarter was $24.5 million, up 4% compared to the prior year.

OEM revenue was $17.6 million, up 2% compared to the $17.3 million we recorded in the prior year. OEM revenue growth was driven by the strength of our printer imaging business which has partially offset our reduced revenue in our non printer OEM business. The reduced revenue was primarily attributable to a few larger ISV customers.

This marked the second consecutive sequential quarter revenue increase for our printer business. We are encouraged by the follow-through from our printer customers and we remain confident in our ability to drive revenue growth in our ISV and other OEM device categories during the remainder of the fiscal year.

Creative Professional revenue was $6.8 million, up 8% compared to the prior year. We are pleased to see the return of year-over-year growth in this business. Gross profit margin for the quarter was 89% of sales. Operating expenses totaled $15.2 million during the first quarter, representing a $900,000 or 6% increase from the prior year. $300,000 of the increase related to amortization and stock based compensation.

Cash expenses increased $600,000 or 4% due to increased operating expenses related to our Planetweb acquisition, severance and personnel related costs. Operating margin for the quarter was 27%, compared to 28% in the first quarter of 2009. Other expenses of $1.4 million primarily related to interest expense on our debt.

Net income for the first quarter was $3.3 million and earnings per diluted share were $0.09, both consistent with the prior year period. Net adjusted EBITDA for the quarter was $10.2 million, representing a 42% margin. This compares to $10.1 million in the prior year. First quarter net adjusted EBITDA included approximately $200,000 of severance related costs. As a reminder, net adjusted EBITDA is defined as operating income plus depreciation, amortization and share based compensation expenses.

Cash flow from operations for the first quarter was $11.2 million, compared to $16.4 million in the prior year. During the first quarter of 2010, we received one $5 million pre payment, versus $10 million from two customers in the first quarter of last year. We did receive the $5 million pre payment last month, which will be reflected in our second quarter cash flow.

Cash and cash equivalents as of March 31st 2010 sit at $38.2 million, a $3.6 million increase since year end. Total debt outstanding at the end of the quarter was $83.8 million which was down $7.5 million from year end. Our first quarter debt repayments included annual crawl back of $5.2 million. We're scheduled to pay down an additional $8.6 million of debt in 2010.

Now turning to our outlook, for the second quarter of 2010, we expect total revenue of $24.5 million to $25.5 million, gross margins to be approximately 88% to 89% and operating expenses to be $15.2 million to $15.5 million. We expect net adjusted EBITDA to be in the range of $10.2 million to $10.7 million for a margin of approximately 42%.

Finally we anticipate earnings per share of $0.09 to $0.10. Our Q2 revenue guidance calls for revenue growth of 10% to 15% compared to the prior year. Growth is expected in both our OEM and Creative Professional businesses. For the full year 2010 we expect total revenue of $102 million to $106 million, which represents growth of 9% to 13%, gross margins showed [ph] approximately 88% to 89% and operating expenses are expected to be in a range of $62 million to $64 million.

We anticipate net adjusted EBITDA to be in a range of $43 million to $46 million, which represents a margin of approximately 43%. We anticipate earnings of $0.38 to $0.43 per share. From an investment perspective, the predictability of our business model has afforded us the opportunity to invest for growth even in difficult economic periods.

Our investments over the past year have positioned us to capture the opportunity a device category such as eReaders, new technology such as graphical user interfaces and new markets such has web publishing. We will continue along with our stated strategy to fund these investment areas as well as look for additional ways to grow the company.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Ralph Schackart from William Blair. Please go ahead with your question.

Ralph Schackart – William Blair

Hey good morning guys. How are you?

Doug Shaw

Good how are you doing Ralph?

Ralph Schackart – William Blair

A couple questions if I could please. If I look at the guidance, obviously numbers are going up and trending with what we see in some of our other licensing companies. Just curious, trying to engage the order of magnitude, perhaps the conservatism in the guidance. Just looking at HP's result, their first positive comp in almost two years. Can you sort of give a sense of implicitly or explicitly what's in your guidance and perhaps how conservative you're looking at the outlook please.

Doug Shaw

Yes, I don't think it's overly conservative. Frankly when I look at what HP reported to the market as far as the unit decline last year. We didn't see that same kind of unit decline or revenue decline in our printer imaging business. As you know we got font royalties. We also get printer driver and color which actually was up last year. So our drop was not as severe as maybe HP's was. So our climb out, we're don't have as much of a valley to come out of. So when we talked about our customers who decreased their units by high single digits, basically we're forecasted in that area with our printer imaging business.

Scott Landers

Ralph, one of the things to keep in mind, its probably a good opportunity to point out the seasonality of our business due to some of the fixed payments we have in the second half of the year. So if you take our Q1 results and our Q2 guidance and you annualize that and then we'd be looking at an additional $5 million in payments in the second half of the year. So that gets us pretty much to the mid range of guidance. So we're pretty conservative and not overly optimistic and our plan would be to update as we earn more.

Ralph Schackart – William Blair

Okay, right now HP isn't perfect but it's at least a proxy for people like me to look at.

Doug Shaw

Yes, absolutely.

Ralph Schackart – William Blair

Just two more if I could. On the e-book reader, can you remind us, some of the OEMs your dealing with that are either royalty free agreements and some that would be royalty bearing to the extent you could give us some color on that please.

Doug Shaw

The tricky part is that the one we announced today, I know we talked a little bit in code because of the ability to mention them a name. It's a leading provider of e-books and that's probably as I can go. It's a royalty bearing relationship. We are doing quite we did announce Barnes & Noble last quarter.

We are working with other OEMs. I do think that we have the potential to kind of dominate position that we have on the printer side when it comes to licensing fonts and fonts technology. We are actively focused on achieving that kind of dominant position on the e-books side. This should – some of the customers were not allowed to talk about rate now.

Scott Landers

Yes. I would just add to that still we all are forgetting to stay away from getting specific with customers, but I think the key takeaway here is that we are seeing good traction in getting a royalty base model, which means we are bringing significant value to the customer base versus being forced into an upfront fee or a six fee per year. So, that's the good news here and I think the message we want people to take away.

Ralph Schackart – William Blair

Fair enough. If I could ask the entire level questions related to e-book readers. You sort of talked about high level, will it start to flow through in 2011 and anything, any meaningful measurements or more sort of a little beyond the 2011 results?

Doug Shaw

I think 2011, we should see a nice uptick in this business. It's hard to gauge exactly how bigger could be for us. The cubicle [ph] in-stat that has looked at the market and their forecasting for example this year in 2010, there will be roughly six million e-book shipping, but when you look at 2013 and you look at e-book sales enough books been downloaded, they measured as a $9 billion market, so and you just look at what's going on with the iPad and also the rest and this is an awful lot of buzz going on with electronic books. Sometimes people would buy the dedicated book and that's all it does. Sometimes they will buy things like the iPad to do these other things. So, we are the beginning stages and it's all about from our standpoint its account wins, making royalty bearings, and then see how the market evolves.

Ralph Schackart – William Blair

Right, and then are you extracting any royalties, are they actual publishers, are they actual e-books or shift on the device side?

Doug Shaw

Today its' just a device side that we do think our Web Font services offering could have a link into this, so now when you download the e-books why not tag on to our external server and links the font write over.

Ralph Schackart – William Blair

Right, one more and I'll turn it over. You talked about some of the GUI opportunities on system electronic devices. Can you give us a little bit more color on that maybe specifically what devices you are looking at, and again would that be sort of opportunity that would begin to float through in sort of 2011?

Doug Shaw

Yes. I think its 2011, and what's good about our technology is it's really is focused I'll say at the lower end of the consumer electronic market or the consumer appliance market, but devices that have minimal processing power. So, we are not targeting things like Smart Phones. We think that's the space that maybe flash and others can do a good job at. What we are targeting is digital cameras, we are targeting printers maybe inkjet printers, laser printers that have small little screens on them.

We are targeting light goods meaning refrigerators and ovens, devices that traditionally you didn't see displays on, but we think it's just a matter of time where frankly we think all devices overtime will have this kind of display.

Ralph Schackart – William Blair

Great, that's about it. Thanks guys.

Doug Shaw

Thanks.

Operator

The next question comes from Steven Frankel from Brigantine Investors – Advisors. Please go ahead, sir.

Steven Frankel – Brigantine Advisors

Good morning Doug. You've talked in the past about the mobile handset market shifting towards more of a platform and as a platform business really opens up an opportunity for scalable funds and for you guys and obviously we've seen some platform players like Google Android and Apples iPhone really emerged in the last three or four months. Could you give us a status update of kind of where you are and discussions with the key players in the industry on moving towards more prominent use of scalable funds and handsets?

Doug Shaw

Sure. I'd say that our strategy over time is evolving as the market it. Latest stats that I saw is when you look at feature phones versus Smart Phones, I think it was like the end of 2011 they were suppose to have 50%-50% market share, so pretty amazing how Smart Phones have really gained in popularity and some of this Smart Phones shipped with the Google Android solutions, which comes with font scaling and comes with a course set of Latin fonts.

So, on that environment frankly our strategy could be try to beat them or join them, and in that environment well, we will be focused on is offering Asian solutions, Chinese, Japanese, Korean as well as there's a handful of OEMs that really do want publishing funds like Helvetica and other popular Type bases in the device. For the rest of the world that doesn't ship with scalable funds, we have our iType solutions and we will offer a worldwide font solution. So, I'll say right now we are really focused on market share, make sure we are the dominant supplier to Smart Phones because that's where the market is gravitating and we think that's where the market is gone. So, we better be there for it.

Steven Frankel – Brigantine Advisors

Right, and how about an update on your old font especially on the printer side?

Doug Shaw

Nothing concrete other than printer imaging side is absolutely is our number one initiative for this year entitled to our printer customer is about the value of bundling this 50,000 character fonts within their printer to give them out of the box localization, and we are getting traction. We have not announced any customers that are a whole flu of customers that ship an aftermarket version that's HP ships in aftermarket version of it.

So, does Xerox, so does Cannon, so does Lexmark but what we really want is for us to be embedded in the device, so nothing concrete Steve yet, but we do think there will be OEMs that will actually want to embedded in the device. There is enough customer window want to do that, and of course, the one from our standpoint is that should move our average royalty rate up with those OEMs.

Steven Frankel – Brigantine Advisors

And what's the timing on moving the Web Font initiative you announced today from beta to revenue, as obviously as a full release?

Doug Shaw

We are saying that it will be released this year to the second half of this year. It is a subscription model, and so what that means I think is that you get a nice long-term return for a customer, but it is gradual. So, as we starting revenues, you could see Q1 having some okay revenue, but building to Q2, Q3, Q4 over time where really is, it's really built on itself. So, it's hard for us right now to put a forecast together. Frankly, we don't have a concrete forecast for this business.

Although that we did really know there is a big market demand. We are getting some nice early press, LA Times just wrote a nice article about the service, so it's something we know as the market need for how big it could be and when, so a little bit of anybody's guess, but it feels good right now.

Steven Frankel – Brigantine Advisors

Okay, that's all the questions I had for this morning, thank you.

Doug Shaw

Okay.

Operator

The next question comes from Matthew Kempler from Sidoti. Please go ahead.

Matthew Kempler – Sidoti & Company LLC

Good morning.

Doug Shaw

Good morning, Matt.

Matthew Kempler – Sidoti & Company LLC

Just a follow-up on the Web Fonts. I know we have the company presented at Web 2.0 Expo, I'm just wondering if you can maybe talk a little bit about the reception for that solution, and then I've read a few other font services that have been launched, maybe you can compare what you think your solutions brings to the table that might not be out there today?

Doug Shaw

Sure. I think the biggest thing that we bring to the party is we are offering the fonts that the graphic art community is using today. So, we look at I don't know pick a number, but it is 90% of all the words documents as they use Monotype Fonts meeting Arial Times or Roman, Helvetica, Frutiger mean we are in a position where our fonts are the standard one when it comes to print publishing. So, now we are bringing into the web.

We are also offering a sizeable non-Latin library so as the whole flow of Asian Typeface, we are supporting 40 different languages. I don't think the competition today offers that. Just sheer numbers of fonts, our beta will have 2,000 fonts by the time you launch it will be 7,000 fonts. So we think the largest selection in the industry particularly in support of the Asian languages downloading fonts can be a lot of data and it can take quite a while, so we have a pattern cutting technology that slims it down and it sends it down really fast to the customer, and then frankly on the pricing side they were not sharing the details.

We don't really want to tip off our competition frankly, but the global would be to get broad acceptance. So, I mentioned that at certain levels that would be free and then we think a very reasonable subscription program depending on usage where it won't hurt very much to get into the game and then you just can see what value we offer.

Matthew Kempler – Sidoti & Company LLC

Okay, and what will be the primary difference between the free service for the 2000 fonts and the expenditure business, just the number of fonts we've accessed towards there, nothing else in there?

Doug Shaw

It's a reasonable question. We really don't want to get specific on the pricing. It really you just focus on broad acceptance, and we will charge when we offer more value.

Matthew Kempler – Sidoti & Company LLC

Okay, all right thank you.

Doug Shaw

Sure.

Operator

The next question comes from Ross MacMillan from Jefferies & Company. Please go ahead.

Ross MacMillan – Jeffries & Company

Thanks. Doug, did you display OEM business, so not the non-software OEM business outside of printers, did that grow faster than the printer business this quarter?

Doug Shaw

No. it didn't. It did grow, but it didn't grow faster. I think what happened last year is the printer business dropped quite a bit lat year and our other OEM business dropped I'll say marginally didn't drop as much, so again there is not as much off a drop to come out of. So, our other OEM business definitely increased in Q1, but there was an offset on our couple of handful of software advantages, Scott mentioned that were down that brought the whole number in line.

Scott Landers

Yes. So, Ross you've talked about ISV is being a component, that's where we felt the softness. The good news for us in things that we monitor is our key recurring kind of device-based royalty customers. We did some growth there, and it was really specific to a couple of ISV customers, which we don't think it's a long-term trend.

Ross MacMillan – Jeffries & Company

So the non-software piece did grow, the non-software, non-printer OEM business did grow?

Doug Shaw

Correct. Yes.

Ross MacMillan – Jeffries & Company

And then just maybe two other questions. If you look historically when this bill was introduced, there was new sub, printer subsystem from Microsoft called XPS and of course most corporations didn't adopt these, so it didn't really get embedded across the laser printer market. How do you think about Windows 7 impact on the laser printer industry and whether, you're already starting to see a lot of OEMs looking to put that XPS subsystem into their products because they anticipate a much stronger adoption of Windows 7.

Doug Shaw

I think that's a reasonable argument but in reality I'm not hearing about XPS at all. So I think the market is kind of shook up that it doesn't offer from the printer vendors standpoint, much value really from the customer standpoint. There's a couple of niche things like printing transparencies where it's better at.

So I don't know of any increased momentum at all for XPS. We're in the XPS printer driver business. We offer it. And I know the amount of OEMs that are requesting it is very small. There was some initial push a couple of years ago. So the people wanted to hedge their bet. But today it's very quite as far as supporting that, even for Windows 7.

Ross MacMillan – Jeffries & Company

Okay and then just as I think about this new offering, the Web fonts, it seems that it could be very high gross margin relative to your classic CP [ph] business. Is that the case? Is it going to really be more like, almost like an OEM type gross margin?

Scott Landers

Yes, it's probably somewhere in between Ross. We think the competitive advantage that we have is that we have a very large library of font ip and we plan to offer because we think our customers want it. So that should certainly drive higher margins. I'm always hesitant to say printer like margins but it's certainly somewhere in between given the libraries that we have.

Ross MacMillan – Jeffries & Company

Great, thanks a lot.

Doug Shaw

Thanks Ross.

Operator

The next question comes from Jeff Rath from Canaccord. Please go ahead with your question.

Jeff Rath – Canaccord

Hi guys. Most of my questions have been answered and I guess, just to round out the web fonts questions here, you've given us timelines and some of the tactics around the rollout. Given that its going to be subscription offering initially, is there the potential for costs, launch costs, marketing costs that kind of run ahead of revenues in the early – call it the first 12 months as your sort of pushing that into the marketplace and given sort of the revenue contribution will be probably more modest. How should we think about the revenue and costs associated as you roll that service to market.

Scott Landers

Jeff, its Scott. I think you're absolutely right. A lot of the costs are getting the offering out there. You don't see in the P&L the kind of capitalized things that are still not a big income statement item for us to consider but marketing certainly will be head of the revenues. If you look at our annual guidance on operating expenses you would notice that they would trend out higher in the back half of the year. So we certainly see some of that. But the key takeaway is that it's booked into our guidance from both the cost side and the revenue side.

Jeff Rath – Canaccord

Okay, and just a couple more and I'll pass it on. You talked about – other than it's a really solid quarter that you just described, some weakness in the ISV. Specific to that weakness, is that something that is persisting in the early trends in Q2 or do you already see that that weakness is sort of moderating. How should we think about that?

Doug Shaw

Jeff, we had a little bit of an anomaly. One of our ISV customers actually reports – so you're familiar on the OEM side, how we're in a one quarter lag?

Jeff Rath – Canaccord

Yes.

Doug Shaw

We have one customer that actually pays us on a two quarter lag. So it's – the revenues that we would have received in Q1 would have been from six months prior actual end user activity. So it's back when the economy wasn't rebounding as quickly. So it's an anomaly within our business. It's a two quarter lag. We do feel good about that long term for the full year.

Jeff Rath – Canaccord

All right, that's good color. And then I guess the final is more of a financial question. You've given us full years guidance here but if I recall last quarter, you did talk about some of your cost suppression initiatives as sort of possibly dampening the operating cost leverage that you're going to get as the economy kind of comes back. So just generally speaking here, how are you thinking about your overall operating cost growth versus your revenue growth going forward? Do you think that, and you talked a little bit about it on the back half but do you think you in a situation where cost at least for the next couple of quarters, two or three quarters could outpace incremental revenue growth?

Scott Landers

You have to look at the actual percentages. Certainly, if you look at our guidance, the $62 million to $64 million, we do see the potential for the back half of the year to step up $300,000 to $500,000 increment in order to get into that range. I think more importantly what we talked about last time was the beauty of our model, once you get over a certain point, you get about 70% or more that can drop to the bottom line for a revenue dollar. And I think for us, as we look at our model and our guidance range, I think when you get to the high end of the range that we're at how, that's really the lever point where anything kind of above that 105 returns to our traditional model and I think longer term what be looking to do is grow the bottom line at a multiple of the top line. Whether that would be 1.5 to 2 will depend on specific investments that we're going after but we think 10% revenue growth should equal 15% to 20% profit growth.

Jeff Rath – Canaccord

Great, thanks very much. Good quarter.

Doug Shaw

Thanks.

Operator

(Operator Instructions). And the next question comes from Saket Kalia from JPMorgan. Please go ahead.

Saket Kalia – JPMorgan

Hi guys. It's Saket for Sterling. How are you?

Doug Shaw

Hi Saket

Saket Kalia – JPMorgan

Hey, just to clarify, I might have missed it but last quarter you talked about sort of printer shipments up in the 6% range for fiscal '10. Did you give an update on that this quarter?

Doug Shaw

Directionally. We said that our customers are seeing high single digit increases this year and that we're modeling that our revenue will be in that same area.

Saket Kalia – JPMorgan

And when I look at sort of the higher guidance for the year, would you say that it's really the printer business that's driving the $2 million increase to the top line primarily?

Doug Shaw

Yes, I think that's fair. We're seeing some nice activity on the Creative Professional and other OEMs but when did the forecast last quarter, a concern that we had was we started one quarter up unless we're another quarter up but we were concerned that would we see increase in Q2 because of channel build up. We didn't know if these printers were leaving the loading docks but then stuck in the channel. So frankly, just to be conservative, we assume that was happening and that's why our guidance was lower. That's what we're seeing. Now we're seeing 2 and 2.5, maybe almost three quarters now of royalty reports and talking to our customers, will they sell through from the channel is almost equal to what's leaving their loading dock and so everything else is basically doing what we expected and the uptick in our guidance is because the channel under these devices they're selling.

Scott Landers

And if I could add to that, certainly from an OEM standpoint, it's a positive but on the Creative Professional side as well we've had the best web quarter that we've had since Q2 of 2008. The company we said has strategy to leverage our existing customer base and offer more value and certainly Flex [ph] is an example of us doing that.

And then on the direct side, we now have a good six months worth of data with an increasing pipeline and probably more importantly now, increased closure rates and increased deal sizes. So we're not projecting a sky rocket here but certainly the predictability of our business and customers coming back to the able, we're seeing it.

Saket Kalia – JPMorgan

Got it and I guess you kind of hit on this a little bit earlier Scott but just to kind of flush it out, so revenue is going about $2 million, EBITDA is going up about $1 million. I'm guessing the extra million in expense is kind of being reinvested around sort of the e-book opportunities as well as some of the other things you talked about as the call ran [ph].

Scott Landers

Yes, absolutely. So our investments are fully funded. We've talked about web fonts and we did have a question on marketing dollars coming ahead of the revenue. And it's also, just as our revenues went down, our variable cost related to compensation, commissions and monitor strength. You get some of that as revenues go up. And we talked about in the last call that that 10% revenue growth was kind of the lever, so kind of get more drop into the bottom line and I think as we hit the top end of our range or as the business goes higher in the out years is when where we get more of a traditional drop to the bottom line.

Saket Kalia – JPMorgan

Got it. Thank you.

Operator

We have a follow-up question from Ross MacMillan from Jefferies & Company. Please go ahead.

Ross MacMillan – Jefferies & Company

Thanks, Scott, just one thing you mentioned, the prepayment from the customer about $5 million I think that rolled over into 2Q. If I understand that correctly, I should probably think about adjusting my deferred revenue for that if I was to do like-for-like, in other words, add it back. And then second of all, I presume that has no impact on the ratable revenue recognition?

Scott Landers

You're correct. So when we give you those payments, it does go to deferred revenue and then we recognize them during the year.

Ross MacMillan – Jefferies & Company

Thanks.

Operator

(Operator Instructions). There appears to be no further questions at this time. Please continue.

Doug Shaw

Okay. So I'd like to thank you all for joining us today and we appreciate your continued support of Monotype Imaging. We look forward to speaking with you folks soon. Thank you.

Operator

This concludes today's Monotype Imaging conference call. Thank you for participating. You may now disconnect.

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