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Bitstream Inc. (NASDAQ:BITS)

Q1 2010 Earnings Call

May 17, 2010 4:30 pm ET

Executives

Anna Chagnon – President and CEO

Jim Dore – VP and CFO

Analysts

William Martin – Raging Capital Management

Alex Washburn [ph]

Operator

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Q1 2010 earnings release conference call. Currently, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay. I would now like to turn the program over to our speaker, Anna Chagnon. Ma’am, please go ahead.

Anna Chagnon

Thank you. Hello and welcome to Bitstream Inc.’s first quarter 2010 conference call. I am Anna Chagnon, President and Chief Executive Officer of Bitstream.

Jim Dore

And I'm Jim Dore, Bitstream’s Vice President and Chief Financial Officer. We will begin this conference call with highlights for the quarter, followed by a question-and-answer session. During this conference call, we may make forward-looking statements within the meaning of section 27-A of the Securities Act of 1933 as amended and Section 21-E of the Securities Exchange Act of 1934 as amended.

Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties including without limitation, market acceptance of the company's products, competition, and the timely introduction of new products. Any forward-looking statements made during this conference call represent the company's judgment as of today and we caution listeners not to place undue reliance on such statements.

A short time ago, we reported our results for the first quarter of 2010 with the following financial highlights. Our aggregate cash, cash equivalent and investment in marketable security position at March 31, 2010 was $20,040,000, an increase of $2,011,000 from a balance of 18,029,000, at December 31, 2009.

First quarter revenue increased $207,000 or 4%, to $5,208,000 for the quarter ended March 31, 2010, compared to $5,001,000 for the same period last year. And our current size revenue may vary quarter-to-quarter due to the timing of license agreement.

Our type OEM on Pageflex publishing revenues continued to be affected by global economic concerns and decrease in consumer spending, causing delays in the licensing in our software products as well as decreases in royalties received from shipment of consumer products in the previous quarter.

Our MyFonts.com e-commerce sales, however, continued to recover recording a substantial increase and resulting in a $559,000 increase in our direct licensing revenue or 21% as compared to the first quarter of 2009. The increase in e-commerce sales during the three months ended March 31, 2010, led to an increase in third-party cost of revenue consisting primarily of royalty expenses of $579,000 or approximately 39% as compared to the quarter ended March 31, 2009.

Cost of licenses as a percent of license revenue was 55% for Q1 2010, an increase from 42% at Q1 2009. Our product mix fluctuated between products bearing, various royalty rates and our e-commerce revenue as higher cost associated within than our type technology and publishing license revenue.

Due to anticipated e-commerce revenue growth, we expected the cost of license as a percent of sales for 2010, will continue at a level above that reflected for 2009 until such time as revenue from our OEM type Pageflex publishing and browsing license revenue increased relative to the increase in e-commerce revenue.

Our Q1 2010 cost of services as a percent of revenue from services was 39%, a decrease from 47% from Q1 2009, primarily due to the deployment of consulting personnel in to research and development projects. Our service infrastructure has remained relatively unchanged since the first quarter of 2009.

The roller coast margins realized from e-commerce sales contributed to our operating loss, increasing to $403,000, for the three months ended March 31, 2010 as compared to an operating loss of $166,000, for the same quarter in 2009. Despite reducing total operating expenses for the three months ended March 31, 2010, by $81,000, were approximately 3% as compared to Q1 2009, a $525,000 increase in cost of revenue during the quarter caused our net loss to increase from $153,000 or $0.02 per diluted share, for the three months ended March 31, 2009, to $398,000, or $0.04 cents per diluted share for the three months ended March 31, 2010.

The decrease in operating expenses was primarily due to decreases in sales and marketing expenses of $320,000 and general administrative expenses of $29,000, partially offset by $178,000 increase in research and development expenses. Primarily in salary, and other compensation expense associated with our BOLT web browsing product and from the reassignment of certain consulting personnel to research and development positions within our publishing product line.

The decreases in marketing expenses included decreases in trade show participation, sales commissions on less commissionable sales, decreases in the use of outside professional marketing consultants and a temporary decrease in sales and marketing personnel.

The decrease in general and administrative expenses was primarily due to decrease in bad debt of $147,000, partially offset by increased Investor Relations related costs and professional services including audit tax and consulting costs of approximately $21,000 and $87,000 respectively. Anna?

Anna Chagnon

Thanks Jim. We were impressed by return to growth of revenues from e-commerce product line during the first quarter, as surpassed our expectations, since the first of our product lines to return to growth after the economic downturn. Although this growth in e-commerce revenue also decreases our margins given the associated royalty payment is exciting to see the significant move forward of this business segment.

Our OEM type revenues were still down in the first quarter due to lower than anticipated consumer shipments by our electronic states consumers in the fourth quarter and reported to us in the first quarter.

As we mentioned in our last call, fourth quarter shipments were still down from prior years based on less than stellar 2009 holiday buying season, so we do not see the trend continuing for the immediate term.

The big news is that we did closed some significant OEM deals for our OEM type product line recently that will improve revenue generation in the latter half of this year as those products begin to ship.

As we mentioned in our last earnings release call, we begun executing on our plans to expand our resources for our BOLT product line to renew hires on aggressive new development plans. We are well underway with the hiring process and expect to be adding several exceptional people with strong wireless backgrounds each quarter as we work through the hiring process.

Our business development and sales outlets for BOLT are going extremely well and we expect to make some additional announcements this quarter. Timing of announcements is not always in our control but we understand the importance of sharing the news of new deals and modification efforts we are doing as quickly as possible and we will endeavor to do so.

On the top of our list is the beginning of the monetization strategy for our mobile advertising, which is well underway and announced and expected in the coming weeks.

We also have team members traveling globally to work on and close immediate business opportunities and develop long-term strategies of carriers of OEM’s. We now have 6.7 million downloads to date and we incurred over 1 billion pages, our largest user base includes Indonesia at 17%, India at 14% and the U.S. at 11%. We are adding over 30,000 users per day and our products are now shipping on cell phone as preloaded.

As many of you have heard, Nokia announced the acquisition of Novarra, a competitive browsing company. Although, direction for their own products is clear, we feel this acquisition will be beneficial to both, as Novarra customers all top tier carriers look for ultimate browsing solutions in the months ahead. We hope to utilize our new hires to better capitalize on these opportunities.

For our Pageflex product line, we see some interesting opportunities to acquire substantially all the assets of Press-sense limited for $6.5 million in cash and the assumption of why least related to the deferred revenue.

Based in Israel, Press-sense is a leading developer of Business Flow Automation systems. The Press-sense business will compliment and expand PageFlex’s product line of enterprise brand management and web-to-print solutions to create one of the most robust and offering of business management tools available in the marketplace and print industries.

And fully automating the creation, product and back office processes for document orders, which will provide the tools to enable customers to maximize production efficiency, monitor and reduce cost and increase profits. Press-sense’s software holds a dominant role at the intersection of web-to-print and MIS.

The company’s flagship Press-sense iWay print-on-demand workflow and management solution has been adopted as the sole OEM web-to-print solution by major digital print manufacturers, including Xerox Corporation, Hewlett-Packard, and Océ, resulting in an installed base of more than 1,500 customers in North America, Europe, and Asia Pacific

The acquisition of Press-sense allows us to immediately expand our business by selling through OEM channels including HP, Océ and Xerox. The Press-sense iWay product is predominantly going through these channels today and we have reached preliminary agreements to continue sales through these channels immediately.

One of the things that attracted us to Press-sense was the focus on these channels and their experience in building successful working relationships. As we are also keeping almost all of the employees we feel that we could have a smooth transition and continue to develop revenue from these channels.

We have received support from the top management HP, OCE and Xerox acquisition and they have provided public quotes endorsing their support of our company and the acquisition.

In addition, the Press-sense acquisition brings the more global focus to our company and all of our product lines. As Press-sense is a very strong player in Europe, Middle East and Africa, we feel we can help us expand our customer base globally for our publishing product line of which the Press-sense products will be a part.

In addition, having office in Israel will enable us to provide business hour support for both OEM’s and the customers in the EMEA time zones. Combined with our support from our team in India, we will have the ability to support new customers to vote globally which could be key to landing major accounts worldwide.

As part of the 2010 Annual Meeting, we look forward to welcoming Raul Martynek and Melvin Keating to our Board of Directors. We believe that both of our new board members will add significant value to our board and will provide new approaches in helping us achieve our strategic objectives.

We hope you will take the opportunity to vote for them today. In an effort to expand investor relations efforts, we will be presenting at three investor conferences this quarter. The Sidoti Conference, the NYSHS Technology Innovative Conference and 2010 Better Investing National Retail Investor Conference. We hope you will be able to see us there.

Thank you for your continued support we will now answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question in queue comes from William Martin. Your line is open.

William Martin – Raging Capital Management

Hey, guys. Good afternoon, how are you?

Jim Dore

Good afternoon, Bill. How are you?

Anna Chagnon

Good morning, Bill.

William Martin – Raging Capital Management

Good. But just curious if you – maybe you could give us a sense of the financial of Press-sense and how you think that will impact the bottom line?

Anna Chagnon

Well – the financials of the Press-sense funds because we have not until assumed their business or their liabilities. They were a company that was VC-funded and at one point they grew to be very substantial, because they obviously will try and keep it for most out of the OEM relationships, unfortunately, that wasn't sustainable and that put them into a position that that have to be sold. Our plan is to really capitalize on the OEM revenue and to create a profitable business within the next several months, depending on how things go with the OEM'S. They do generate significant revenue. They have generated in past significant revenue, although were down since they run into receivership. But we do think that revenue can be not only sustained but grown based on our discussions with the OEMS.

Jim, is there anything you think we should add at this point?

Jim Dore

No. That covers it. It's an asset purchase. We are not taking on the liabilities. We will have some deferred revenue. We will have the assets and we will hire a percentage – a large percentage of the employees.

William Martin – Raging Capital Management

Are they – Is it a primarily a recurring subscription based model or is it more of a licensed maintenance support model or?

Anna Chagnon

It's predominantly a license model and maintenance as well through OEM'S channels. So the sales force tactically the OEM'S predominantly and the value added briefly [ph].

William Martin – Raging Capital Management

Can you give us some sense of the expense base you are acquiring and how it will impact your gross margin?

Anna Chagnon

I think, to be very honest with you, Bill, it's too early to tell. To be Frank, we received court approval today. We do have some ideas of how we are going to staff it, but at this point all we bought are the assets. So we need to figure out the plan going forward for how we are going to staff it and how it's going to affect the bottom line. As for gross margins Jim, I think you can address that one.

Jim Dore

The gross margins are similar to our publishing business. On the license fees, they are at 85- 90%, but they also have a large support and consulting revenue stream that will have a higher cost of 40-50%.

William Martin – Raging Capital Management

Got it. And then looking at your business, I was wondering maybe if you could provide a little bit of color around the strength of the MyFonts, and what you are seeing there, then looking at what the print? How is the Pageflex business performance and is that still weak?

Anna Chagnon

I actually missed the last part of Bill's question. Jim, did you hear it?

Jim Dore

It was to address the publishing revenue if that business is still weak and the e-commerce increases.

Anna Chagnon

Well. I think e-commerce increases are a result of consumers returning to purchase, as well as us having the largest acquisition rates we ever had. For obtaining new customers, so it's probably the combination of those two things that are causing the increases in e-commerce revenue. For Pageflex revenue, it still is down from prior years in part due to the still controlled spending in the market. But we do hope to see that loosening up very shortly and in addition earning the Press-sense product line, she then will be integrating them for hours, will give us a number of whole opportunities to their 1500 customer base and to our customer base. And the ability to both increase maintenance streams and increase license revenue. So we think this is strategic financially as well as product wise.

William Martin – Raging Capital Management

Now, let me just ask one more question. You anticipate Press-sense and Pageflex to be sold as integrated solution, or is it a modular buy or how does that work and what's the synergy there?

Anna Chagnon

Well, synergy there is that Press-sense and strength is in workflow automation from when a document is ordered to when it goes to press. Our strength in the front-end, which is the creation of the document doing variable data, doing possibly publishing, we both have solutions that are technically in the web-to-print Storefront space. Our solution does go to print, but we don't have all of the back room processing, handle processing that a lot of the OEMs require.

In addition Press-sense doesn't have a lot of the front-end variable data that in a competition technology to their customers are now asking for. So eventually, we do think to two products will merge into one and we offered in to – that solutions but that's to new customers. We plan to full support the iWay product to existing customers and to customers today as the Pageflex start separately because there are situations where the Press-sense products are better standalone and Pageflex products better standalone.

So we probably will, it's still too early to tell all the details because we are getting development teams to talk, which is the bidding process in receivership. So it wasn't until today that we actually know that we are the winning bidder. But the theory behind it and the vision behind it that the products are strong independent of each other, if we do nothing, we pick up the revenue line and we can pick up profitability over time in that revenue line. And we pick up very significant major OEM channels that were not available to us.

You add to that effect that the technologies together create efficient where one plus one equals four and could create a solution that is leading the market and so those that handle documents from creation to press, which makes it killer app in our book for the industry. And so then you add to that but we know how to do direct sales they know how to do OEM, we know how to support customers predominantly in the U.S., they know how to support customers in the regions where we are weak.

There is just a lot of pluses, and I think it’s – our customer product instructed where there are different approaches depending on the customers that we are serving. Another great thing about Press-sense is they have a lot of what called multi site customers these are big corporate accounts that have got a big printing accounts that bout huge licenses to their technology.

And that's another area, where we want to get in to that game. So I think we can leverage both technologies independent of each other and that eventually together to create a winning solution. But I think it will be modularized, up sell opportunities or the cross-sell opportunities and there will be whole solution sell opportunities down the road when the parts are integrated.

William Martin – Raging Capital Management

Great. Well, good luck. Thank you.

Anna Chagnon

Thank you.

Operator

Thank you, sir. (Operator Instructions) Next in queue comes Alex Washburn [ph]. Your line is now open.

Alex Washburn

Hey, Anna and Jim.

Jim Dore

Hi.

Anna Chagnon

Hi.

Alex Washburn

Regarding the – you mentioned the Nokia purchase of Novarra. Do you have any idea what price they paid for that business?

Anna Chagnon

I tried to find out, but no I do not.

Alex Washburn

All right. And…

Anna Chagnon

There – it’s a private company. I don't think it will be disclosed – if it’s not – beginning up from that disclosure.

Alex Washburn

All right. And what percentage of your BOLT users right now are BlackBerry users?

Anna Chagnon

I don't know off the top of my head, the current stats but last I remember, it was around 15%, 20%.

Alex Washburn

Right. That's pretty diversified then types of usage?

Anna Chagnon

Yeah.

Alex Washburn

All right.

Anna Chagnon

Yeah. We actually have over – I think over 6000 handsets that are using BOLT today, so it's very diversified. I think BlackBerry is the largest component. But then it gets very granular.

Alex Washburn

Right. And on the monetization side for the advertising, when do you expect to actually see revenue and how large could that be?

Anna Chagnon

We do expect to start seeing revenue, we signed deals this quarter, we expect to see revenues probably starting for that strategy in Q3. We feel it can be quite significant and again it's partially going to depend on aside from user base and how much our user base is pulled through the strategy and uses advertising. But if we look at other companies have done, there is a lot of public information there about what Firefox has done, Opera has done a lot of those companies are getting substantial revenues from advertising. So we definitely think it's millions and millions of dollars as to how high it can go, I think it remains to be seen.

Alex Washburn

And on your downloads for BOLT. What – how many of them are one-time download and what percent are actually sticky and download and use it on a continual basis?

Anna Chagnon

It's probably I would guess to say around 25%, 30% that use it frequently. But most mobile browsers don't use browsers every day even know they don't use it continually they might use it couple of times a month. So it depends on the volume of usage that they do as to where that number hits. That's fairly common. I actually think it's – I talked to somebody who is bidding [ph] Novarra, he told me that's what they’ve experienced as well.

Alex Washburn

All right. Great. Thank you.

Operator

Thank you. At this time, there appears to be no further questions in the queue. I would like to turn the program back over to Anna for any final remarks.

Anna Chagnon

I just want to thank everyone for their attention on the call today. I know it was a lot of news today we were tied to the Courts announcement of the Press-sense acceptance of our offer which was today. I'm actually in Israel. And I know there is a lot of things that you want to know about what the future is for that. I know if you give us a little bit of time we will be able to tell you we are working through the details as quickly as we can and hope to close the transaction very soon. So we do hope that we intrigued you tonight and we do hope to have many more announcements in the upcoming months to intrigue you even further. So I thank you for your continued support. And I appreciate your attendance on the call.

Operator

Thank you, Ma’am. Ladies and gentlemen, this does concludes our Q1 2010 earnings release conference call. You may now all disconnect. And have a wonderful day.

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