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
David Delleo – Canaccord Genuity
Saket Kalia – JP Morgan
Monotype Imaging Holdings Inc. (TYPE) Q2 2010 Earnings Conference Call July 30, 2010 10:00 AM ET
Operator
Welcome to the Monotype Imaging Q2 2010 Conference Call on the 30th of July 2010. (Operator Instructions).
I will now hand the conference over to Staci Mortenson. Please go ahead, madam.
Staci Mortenson
Thank you and good morning everyone. Thank you for joining us for Monotype Imaging’s second 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’d like to remind everyone that matters we’re discussing today and the information contained in the press release issued by the company earlier this morning announcing our second 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, 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, July 30th, 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 second quarter press release or on this morning’s conference call other than through the filings that will be made with the SEC concerning this reporting period.
In addition, I’d like to remind you that today’s discussion will include references to net adjusted EBITDA, 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’d 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 second quarter performance reporting top and bottom line growth.
Total revenue of $24.4 million, a 10% increase year-over-year despite some negative currency impact. Net adjusted EBITDA grew to $10.4 million or a 43% margin.
Our business continues to generate significant cash flow. Through the first of the year, cash flow from operations was $21.9 million an increase of 27% compared to the first half of 2009.
Before I provide detail on some of our business activities, I’d like to highlight the financial results of our OEM and Creative Professional businesses, which both experienced year-over-year growth.
Starting with OEM, our performance for the second quarter was $18.4 million, a 9% increase year-over-year. Revenue from traditional ways of printers improved sequentially for the third quarter in a row and we continued to outperform market growth rates. We’re encouraged by early trends for the third quarter, which indicates sustainable demand.
And other OEM categories, we find new agreements with manufacturers of mobile phones, e-book readers and navigational devices. These are evolving dynamic markets with continual requirements for high quality tech in user experiences. We expect increased deployments as we go forward.
Moving to Creative Professional, we reported $6 million in revenue in the second quarter, a 13% increase year-over-year. We experienced constant currency growth across all sectors of our Creative Professional business with the largest improvement coming from non-web activities. With the growing pipeline of direct business, which is driven by increased bending from our enterprise customers.
In our web business, we strong prospects for long-term growth as you prepare for the commercial launch of our Web Font Services offering.
Now, I’d like to discuss the progress we’ve made on our growth initiatives. Over the years, even during the economic downturn, we’ve been able to leverage our business model to fund development and invest for growth.
Recently, we announced an OEM Printer Solution that supports multiple page description languages or PDLs. This was a long-term development effort that resulted in a new imaging architecture that supports our fonts, our universal font scaling technology, printer drivers, colored technology and embedded PDLs. This combination gives OEMs a complete comprehensive solution that enables highly efficient superior quality end to end printing. Devices can also be engineered to complete tasks that are traditionally handled through host computers such as margin control and watermark printing.
OEMs are able to differentiate their products through built-in print management functions and provide additional value to their customers.
As outlined in our recent press release, we are working with Adobe to direct OEM printer customers towards genuine postscript in PDF solutions. Conversely, Adobe is able to compliment its own offering with XPF and PCL support for Monotype Imaging in addition to our font color and printer drivers. We expect OEM to benefit with improved flexibility and choice as a result of greater PDL options available to them.
We believe our new Page Description Language solution represents a meaningful long-term growth opportunity with significant potential to expand our value within the printer industry.
We’re also looking to expand value into emerging areas such as cloud-based printing. Industry leaders such as HP, Google and Microsoft had made recent announcement concerning the ability to print web accessible content from anywhere such as applications, office document, emails or tweets from a mobile device. Cloud-based printing, which targets an increasingly mobile user base, is an exciting opportunity for our printer customers. We are currently exploring ways to provide value in this new printing paradigm.
Turning to other devices, we secured new design wins during the second quarter including another world leader in location and navigation solutions. We also starting to the leading smartphone manufacturer who will be deploying our fonts in variety mobile devices. Now, nine out of the top 12 makers have licensed solutions from Monotype Imaging.
In addition, Samsung’s Galaxy S and Android phones integrates our Flip Font solution, recently began shipping in North America. This follows Samsung’s launch earlier this summer in Europe and Asia. In feedback forms, users have commented under experience in selecting a font that looks great onscreen and suits their personality.
We continue to be encouraged by the opportunities we see in e-book readers. As the importance of easy to read text continues to be endorsed. Last month, Consumer Report gave its top rating to the Amazon Kindle, which uses our font solution. Readability was a key factor in the evaluation with the Kindle being recognized for its crisp readable text.
Overall, we remain optimistic with our opportunities across many electronic devices and expect to see growth in the second half of the year.
Turning to Creative Professionals, we’re excited to report that thousands of beta participants are using Fonts.com Web Fonts, our new cloud-based solution that allows high quality fonts to be used in the web. We’ve had positive feedback on our collection of type phases including designs that are used prominently in branding and advertising, such as Helvetica and Trade Gothic, which are exclusive to our offer.
Beta users from across the globe have tweeted about the high quality and speed of our solution and our selection of Asian fonts. As I mentioned in the last call, more than 7,000 fonts are expect to be available when we launch commercially later this year. Our Web Font solution bridges the typographic gap between print media in the web. Branded content is able to be consistent deployed across the different media.
We believe our Web Font offering has a potential to be a powerful force in bringing typographic freedom to the web.
Now, I’d like to turn to our outlook for the remainder of year. We are pleased with the first half results. We saw year-over-year growth and revenues profits in cash flow. Double digit revenue growth is expected to continue for the third quarter of the fiscal year.
We’ve adjusted our full year guidance to factor in a negative impact of exchange rates. We are now targeting revenue in a range of $101 to 105 million. However, we continue to expect net adjusted EBITDA of $43 to 46 million or approximately 43% over (inaudible).
On the printer side of our business, we believe the strength that we saw from our printer OEMs during the last three quarters will continue throughout the year and with our PDL solution, we are having long-term incremental revenue opportunities to this part of our business. In other OEM categories we expect to see double digit growth in the second half of the year. This will be driven by expanded deployments across device categories with both new and established customers.
Turning to Creative Professional, for the full year, we continue to anticipate year-over-year growth. With the upcoming general availability of our new Web Font solution, we are also confident concerning the future of this business.
Overall, a more stable business environment massed with our expanded product line and increase value propositions positions us to grow our business for the long-term. In addition, our business model continues to drive significant profitability and cash flow.
With that, 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 second quarter was $24.4 million, an increase of 10% compared to the prior year. Revenue for the quarter increased approximately 11% on a constant currency basis.
Like many companies, our revenue was negatively impacted by fluctuations in foreign exchange rates. In Q2, year-over-year currency declines impacted total revenue by approximately $250,000. The portion of our business most impacted was Creative Professional, where a significant portion of our revenue is generated from Europe. The impact to foreign exchange rate on operating profit is minimal since we have operations in Europe and have a natural expense hedge.
During the second quarter, our OEM revenue increased 9% to $18.4 million. We saw ongoing strength in our printer business, which recorded its third consecutive sequential quarter increase.
Our year-over-year OEM revenue growth was negatively impacted by the timing difference of six payments received from a non-printer customer. In 2009, we received payments in recorded revenues in Q2, three and four. We recently expanded our relationship with this customer through a new multi-year agreement. In 2010, the contract generates revenue in Q3 and four only and then quarterly thereafter. Excluding this timing difference, our other OEM business experienced double digit year-over-year growth.
Our Creative Professional revenue was $6 million, up 13% compared to the prior year and 17% on the constant currency basis. Demands for our font is improving as customer slowly resume pre-recession buying patterns. We continue to be optimistic about ability to grow this business for the remainder of 2010 and beyond.
Gross profit margin for the quarter was 89% of sales, down approximately a 100 basis points from the prior year, but in line with our target model of 88 to 90%.
Operating expenses totaled $15 million during the second quarter, representing a $1.4 million or 10% increase from 2009. Operating expense increased primarily due to variable compensation as well as increased cost from our 2009 Planetweb acquisition. Sequentially, operating expenses declined $200,000 due to changes in foreign exchange rates.
Operating profit for the second quarter was $6.6 million representing a 27% margin and a 4% increase over the prior year. Other expense of $1.8 million was primarily related to interest expense on our debt. Included in other income was approximately $400,000 of non-cash losses related to our interest rate swaps.
In the second quarter, we entered into a new agreement that will lock in LIBOR at 1.5% starting in November 2010.
Net income for the second quarter was $3 million, consistent with the prior year. We generated earnings of $0.08 per diluted share compared to $0.09 in 2009. The decline in EPS is attributable to the non-cash swaps associated with our interest rate swaps.
Net adjusted EBITDA increased at $10.4 million, representing a 43% margin.
Cash flow from operations was $10.7 million for the second quarter and $21.9 million on a year-to-date basis, which represents a 27% increase from the first half of 2009.
Cash and cash equivalents as of June 30, 2010, sit at $44.7 million, a $10.1 million increase over year end and a $6.5 million increase from the prior quarter.
Total debt outstanding at the end of the quarter was $81.2 million, which represent a decrease of approximately $3 from the prior quarter and $10 million from year end.
Net debt at quarter end was $36.5 million, a decreased of approximately $20 million compared to our yearend balance. We are scheduled to pay down an additional $5.7 million of debt in 2010.
We continue to strengthen our balance sheet, which believe is a strategic asset for the company.
Now turning to our outlook, for the third quarter, we expect total revenue of $26 to 27.5 million, gross margins to approximate 89% and operating expenses to be in the range of $15.3 to 15.7 million.
We expect net adjusted EBITDA to be in the range of $11.5 to 12.5 million, reflecting a margin of approximately 45%.
We expect EPS in the range of $0.10 to 0.12 per share.
Our Q3 revenue guidance calls for revenue growth of 13 to 19%. Growth is expected in both our OEM and Creative Professional businesses.
For the full year 2010, we expect total revenue of $101 to 105 million, which represents growth of 7 to 12%. Our guidance reflects $1 million adjustment due to currency fluctuations not previously contemplated in our guidance. Excluding the currency impact, our revenue continues to perform in line with our prior expectations.
Gross margins showed approximate 88 to 89% and operating expenses are expected to be in a range of $61 to $63 million.
We anticipate net adjusted EBITDA to be in the range of $43 to $46 million, which represents a margin of approximately 43%.
We anticipate EPS $0.38 to 0.43 per share.
In closing, we continue to execute against our short and long-term business strategies. We are pleased to see improving revenues, profits and cash flows and see aware on solid financial position to capture the growth opportunities ahead.
And 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). And so the first question comes from Ralph Schackart from William Blair. Please go ahead.
Ralph Schackart – William Blair
Hello. Good morning. A couple of questions, if I could.
Doug Shaw
Sure.
Ralph Schackart – William Blair
On the printer OEM side of the business, is there any way you can sort of give us either any quantitative or qualitative data. How much is the growth currently driven by just sort of natural demand after the recession and how much is a benefit of Windows 7?
Doug Shaw
Okay. I’ll answer the question. This is Doug. I’ll answer the question actually backwards. I don’t think we’re seeing any direct pickup from printer sales because of Windows 7. As I think we’ve talked about before, we’re focused on the office market and they seem to be separate purchase behaviors that the IT directors will invest in printers is a separate buy decision and on things like new operating systems is another buy decision.
What we are seeing is across the board, both low end as well high end printers, black and white, in color, multifunction, single function devices, a nice lift in our business. And I think consistently, we’ll be telling the market that we’ve been looking at high single digits. We’re actually revising that now and talking about low double digit growth in our printer business. It’s a combination of units increasing and continues to do well in our printer driver business.
So, it’s in a nice rebound. And as you mentioned in the script, this is the third quarter in a row we’ve seen it and we’re seeing it in our early royalty checks for Q3 as well.
Ralph Schackart – William Blair
Can you give a sense sort of qualitatively, is the growth driven by – I don’t know how to characterize this – by more real demand versus just laughing easy comps.
Doug Shaw
I get you. Well, there’s definitely is an easy comp because although (ph) last year was a tough year for the whole industry. I know we’ve seen from slow sequential growth, but it’s not as if it’s a hockey sticking. It seems to be moving up a stairs step and staying at the stair step. I don’t really know if this is a trend going forward, but I do know when you listen to things like – I don’t know, Lexmark’s earnings call, they talked about how they had more demand than they had supply, and I know HP made the same kind of comment at their earnings call, a couple of calls before.
So, it does feel like this (inaudible) demand and kind of ironically, it feels like they can’t – the printer customers, at least today, can’t actually supply it all. So, signs are good. I don’t know if this is just a rebound or sustainable. Three quarters a row feels nice.
Ralph Schackart – William Blair
Really helpful, maybe one more, if I could. Sort of give us some qualitative or quantitative first talks on the mobile business. Traditionally, there’s nine-month lag for IP licensing business when you get design wins and they really rollout. Can you give a sense, is this business starting to scale? Is it following a traditional sort of design cycle for IP licensing from announcements to rollout?
Doug Shaw
I’d say yes. It is starting to scale. I also think that it’s taking us longer than we had anticipated to get some of the key OEMs to jump aboard or traditional ones are shipping at a nice volume and we’re happy with the royalty checks. It’s taken us awhile to get design wins with some of them, but we did sign a major one last quarter. They’re not shipping yet, so they don’t want us to use their name.
So, I think that the direct answer is yes, it’s scaling but it’s taking longer than we had anticipated. And for example on the Samsung side, we’re really excited about them bundling our Flip Font solution and that’s a nice incremental revenue opportunity for us, but it really isn’t our ultimate goal. Our ultimate goal is to get them to ship RIP and they get pre-enrolled (ph). So, that’s one that’s still elusive but we have our first design one on the Flip Font side, can we leverage that down to something better.
Ralph Schackart – William Blair
Okay, great. Thanks a lot.
Operator
And (inaudible) the next question comes from Steven Frankel from Brigantine Advisors. Please go ahead.
Steven Frankel – Brigantine Advisors
Good morning. On this multiple PDL version that you’ve come up with, could you give us an idea of what the potential revenue uptick on a unit basis might be if that gets designed in and what’s the timing for that to be adopted by customers and then shipped?
Doug Shaw
Okay. If you don’t mind, Steve, I’ll give you a little more beef on what we’re doing and then I’ll answer that question directly.
So, what we did is we basically took the technology that our driver team had developed over the last five to six years for a host printing solutions and for PCL and XTS and brought that to the embedded space. So, now, we can go to printer manufacturers and say, “Not only do we have world class printer driver solutions, but also world class embedded solutions.”
And there’s some speed advantages when you use a common imaging model and this some extra functionally now that didn’t used to be able to do within the printer itself. So, some of the functionality with other solutions, you only can access via the host. Now, with our solution, you actually can get it right from the control panel on the printer.
The other kind of cool thing we’re doing is from our standpoint, it’s cool, is partnering with Adobe. So, now, we can offer what we think is best to class. Adobe has PCL, PostScript and PDF, and we have our fonts and color and embedded XPF and PCL. We sized the entire embedded PDL space is about $150 million market. It’s really dominated by companies like Adobe, Zoran and InHealth Solutions, and our plan really is to target some key accounts, accounts we already have relationships with on the front side or the driver side, and let the best product win. So, looking to evaluate our technology, see the performance and hopefully, they license it.
We’re in early discussions with customers because we’ve just launched the product and it’s really hard for us to forecast albeit no incremental revenue to speak of this year and hopefully it will scale next year. It really depends if we can get a big guy, it helps your customer to go with it. So, it’s a big market, relatively big market, and in our minds that we think early conversations of OEMs like the idea or (inaudible) any choice and we think we bring some advantages.
Steven Frankel – Brigantine Advisors
Okay. And any update on World (inaudible).
Doug Shaw
The only – no real update from last time. Although then a lot of customers are shipping it as an (inaudible) market product. Nobody is shipping it – embed it in their printer device. As of today, we are clearly promoting the value of doing that. So, no (inaudible) on that, but our key focus – I’d say our number one focus on the printer side is trying to get customers to embed that World solution. Embed it in their device and then they’ll print in day one, all these worldwide languages. But nobody is shipping embedded today.
Steven Frankel – Brigantine Advisors
All right. And on your new handset OEM in the smartphone space, I assume that’s for Asian territories at this point?
Doug Shaw
Actually, let me think. No, that’s both Latin and Asian. Also focused on things like Web Fonts, so web-based documents both Latin and Asia.
Steven Frankel – Brigantine Advisors
Okay, that’s progress. That’s good.
Doug Shaw
Yes, thanks.
Steven Frankel – Brigantine Advisors
All right. Thank you.
Operator
Thank you. The next question comes from Matthew Kempler from Sidoti & Company. Please go ahead.
Matthew Kempler – Sidoti & Company LLC
Hey, good morning.
Doug Shaw
Good morning.
Scott Landers
Good morning, Matt.
Matthew Kempler – Sidoti & Company LLC
Just to follow-up on the PDL solution. Could you just review again why your solution is more beneficial to OEMs? Can we get to swap out what they’re using today and then are these transparent consumers or do consumers get some benefit as well?
Doug Shaw
Okay. So, we think when our solution is compared to others in the market, it really is – one is we think we will have a performance advantage because the same underlying imaging technology that’s in our printer driver will be in our embedded solution, so there’s no conversion from one – let’s say data file to another data file. We also think that within the printing device itself from the control panel, you’ll be able to access features that you didn’t use to be able to do. You used to have to go back to the PC or Mac to be able to do certain kind of formatting or document management functionality.
And then there’s just kind of an inherent advantage of dealing with one vendor that can supply your font technology, printer driver, color technology and now, PDLs. And what’s kind of interesting, we did consider frankly that developing our own pole trip (ph) in PDF solution and after talking to our customers, they basically said, “You can do that or maybe you partner with the guys that invented the stuff, Adobe, and work with them to together offer these solutions.” So, we think there’s a marketing advantage as well.
Matthew Kempler – Sidoti & Company LLC
Okay. All right. Thank you. And then regarding the fixed payments, which you – you extended your relationship with an existing client. First of all, can you just talk about that new relationship, any or the expanded relationship, any additional products, any material changes in pricing under the new contract?
Scott Landers
We like the agreement. It extends it for a few more years. It’s more products and it’s more total value.
Matthew Kempler – Sidoti & Company LLC
And then as far as the fixed payments go, roughly what did slip out of the second quarter and then are the payments spread evenly over the third and fourth quarter under this new arrangement?
Scott Landers
So, one thing to point out. There will be a timing difference year-over-year as well. So, last year, we received the total amount. We received the same amount in Q2, three and four, and this year, we’re going to receive a similar amount in Q3 and four. So, we’ll be one payment short on a year-over-year basis, something that affects us on the total comps. But we’re not disclosing the amount, but it’s – that’s probably all I should say.
Doug Shaw
Yes. But it’s built into our guidance.
Scott Landers
Correct. It is built into the guidance.
Matthew Kempler – Sidoti & Company LLC
Okay. And then did you say in 2011, it will now be spread evenly on a quarterly basis?
Scott Landers
That’s right.
Matthew Kempler – Sidoti & Company LLC
Right. So, every quarter, the same amount?
Scott Landers
Right.
Doug Shaw
Matthew, would just to kind of pickup in that. One nice thing is when you look at our kind of lumpy OEM customers, we had four and now, I think we have two.
Matthew Kempler – Sidoti & Company LLC
Sorry.
Doug Shaw
So, we’re slowly as we add more IP and renegotiate these deals, I think universally, we’ve been able to pump up the value a little bit and also spread all of the (ph) payments, something nice.
Matthew Kempler – Sidoti & Company LLC
Okay. And then you mentioned on the call that you signed a number of new agreements for mobile phones, e-book readers and nav devices. Can you talk about – I mean is this primarily fonts or also iType and graphic user interfaces, what exactly are the customers signing up for these days?
Doug Shaw
In general, it’s a combination of the fonts and iType. On the user interface side, no design ones to announce yet. We have a lot people evaluating it. So, we’re encouraged about that. There are a handful of new deals where it’s just the fonts with the FreeType Rasterizer, so it ranges. But I think for Asian markets, it’s definitely fonts plus iType.
Matthew Kempler – Sidoti & Company LLC
Okay. And then how would you characterize any of these wins as significant or are they all individually kind of singles and doubles?
Doug Shaw
We think some of them are significant because its design went with industry leaders that by themselves will generate some nice incremental revenue, but potential add-ons could become very significant. So, hold that for (inaudible), we’re going to answer. You get to impeding (ph) our foot on the door, where people we really need to work with and it has the possibility. And these are agreements that run out over a certain amount of period so that we’ll have to renew them, we’ll add more IPs, so we really have – they have a chance to scale.
Matthew Kempler – Sidoti & Company LLC
Okay. All right. Thank you very much.
Operator
Thank you. The next question comes from Ross MacMillan from Jeffries. Please go ahead.
Ross MacMillan – Jeffries & Company
Thanks. Good morning. Just to be clear, just on that single OEM, of the OEM payment timing. Just to be clear, it’s the same dollar amount in both Q3 and Q4 although obviously that’s higher than last year because it was over three quarters. Is that correct?
Scott Landers
No.
Doug Shaw
No.
Scott Landers
A good way to think of it without using real numbers, but let’s just say it was $1 last year in Q2, three and four, this year it would be about that $1 in Q3 and four. So, from a 2009 to 2010 standpoint, we would down $1 year-over-year and most of that impact would all come in the second quarter.
Ross MacMillan – Jeffries & Company
Got it. Thank you. And then I had question really just relating to this approach of bundling, I guess its two elements to this new approach with the PDL, but also including the Adobe PostScript component. And the first question on that would be when you’re now bundling a solution that includes PCL PostScript and XPS, do you have any sense of your ability to sustain, if you will, the unit price point? Now, you’re bundling more with a partner than before.
And then the second question is when you actually go after a page description piece, do you price more aggressively than your competition such that the material you sell then is higher, but it’s maybe price advantageous to the OEM? Thanks.
Doug Shaw
Yes, good question. Our strategy is we keep our font solution separate because those are existing agreements. So, we’re not going to ever discount our font solution to be able to license either, frankly, drivers or PDL.
So, putting the font to the side, on the PDL side, we view it as a 100% incremental revenue and we view that the plan is not only to satisfy the high end of the market requirement but also go down market versus the volume. Our class structure, frankly, in this market is very low because we’ve got a dedicated team on the driver side that way we could turn this people towards PDLs. So, our plan is to leverage that class structure advantage. We think we have order (ph) competitors and pass it on to our customers.
So, yes, we think that on the PDL side, we can offer aggressive pricing, real Adobe PostScript, PDF, our XPS and PCL as a bundle better than if they decided to do it themselves or outsource it. But we never want to cannibalize our cash cow business, our traditional font business. So, that always be off to the side.
Ross MacMillan – Jeffries & Company
And am I right in thinking that you’ll be the vendor that is actually going to an OEM with PostScript real rather than a clone and PCL real.
Doug Shaw
The way we’ll actually do it – right now, we’re not prepared to give a lot of details exactly how we’re going to package it together. But at a minimum would be something like we go in together with Adobe and offer these kinds of solutions.
To my knowledge, over the year, they have worked with other vendors. But to my knowledge today, yes, we would be the only one in that position.
Ross MacMillan – Jeffries & Company
Okay. And then just two other questions, on the printer side, a lot of the parent OEMs are talking about a big transition from black and white multifunction to color multifunction. And you talked in prior quarters about the success with color drivers, do you feel that that penetration of color drivers into your OEM bases, mostly behind us or is there still a lot of new opportunities to sell these color drivers into OEM customers that you already have.
Doug Shaw
Okay. Do you mean as far as (inaudible) –
Ross MacMillan – Jeffries & Company
I just mean so – it seems to be an accelerating transition towards color multifunction. You obviously had success, but I’m not clear on how penetrated you are with your color drivers into your existing printer OEM customers.
Doug Shaw
Okay. Good question. I think there’s a lot of opportunity. I think that what’s important though is this on the color side just great color technology. There are companies like HP and Canon that have dozens and dozens, if not hundreds of color (inaudible) and they see that as a core competency. So, when it comes out on licensing, our color technology, let’s say it really is – both OEM that maybe don’t have as a robust engineering group and where we can augment what they do have.
I think color printers in general are definitely picking up steam in the office. And a lot of times, what someone will do is license our driver solution and maybe put their own color technology in there. So, it’s architected so that they can use ours that we add value or use their own.
Ross MacMillan – Jeffries & Company
Last one for me, just on the – just again another revenue question, just from the Creative Pro side. That was down a little more than I expected sequentially. I heard you on FX, where there any other factors there such as you thought you might win maybe some like a corporate contract or other factor there, any color there? Thanks.
Scott Landers
Yes, actually when we saw – feel really good about our CP business and it’s doing exactly what we thought it would for the year. While we do run the risk of sometimes (inaudible) others for that business to be a little bit lumpy and this quarter actually, we looked at booked deals, contracts exactly or actually signed. We hit the expectation that we thought we would and it’s looking really good for next quarter.
So, we’ve already had a few deals signed at the end of Q2 that we just couldn’t deliver into Q3. So, for the remainder of 2010 and then beyond with Web Fonts, we’re feeling really good about our CP business.
Doug Shaw
Yes.
Ross MacMillan – Jeffries & Company
Right.
Doug Shaw
Not that I think – it is a (ph) because a lower, lower, frankly, than we thought it would be as well in Q3 as Q2. But like Scott said, it kinds of sets the stage for a real (inaudible) in Q3.
Ross MacMillan – Jeffries & Company
Got it. Thanks a lot.
Operator
Thank you. The next question comes from David Delleo from Canaccord. Please go ahead.
David Delleo – Canaccord Genuity
Hi, guys. Thanks for taking my questions. I just want to follow-up on the last question on CP, sounds like you’re feeling good about it. In Q3, that means we think about this kind us Q2, a little bit of an anomaly here and backup to maybe what we saw in Q1 for this business going forward or are we maybe not hitting that level again?
Scott Landers
No. I think that’s absolutely fair to look at that way. And really if you look at our business last year and you look CP on Q2 versus Q3, we had have in 2009, we had one large deal that we thought was going to happen in Q2, so there’s like $1.4 million delta between the second and third quarter, and that can absolutely happen in this business. So, the first thing we ask ourselves is has anything fundamentally changed in the business and the answer is no, and I think that’s a good assumption.
I think last quarter we said, we thought our new norm here was $6.5 to 7 million a quarter and I think we still believe that.
David Delleo – Canaccord Genuity
Okay, thanks. Scott, thinking what you – your OpEx guidance for Q3, if you look at it as a percentage of sales, it kind of implies a lower run rate than we’ve seen the first two quarters of the year. Anything going on, what the individual line items there?
Scott Landers
No, not materially. I mean sequentially it will be up as we continue to invest in some of our newer initiatives. As a percentage, we’ll get some scale from a variable comp perspective as you look at things on an annual basis through the first half of the year, we accrue have. What happens in the second half of the year, there’s actually more revenues, but we’re still accruing half on the expense side as far as the bigger charter. But between the lines, I don’t think we would expect any major differences.
David Delleo – Canaccord Genuity
Okay. I guess just lastly on tax rate 37% in the quarter, is that how we should think about the rest of year?
Scott Landers
Yes, that’s a fair rate.
David Delleo – Canaccord Genuity
Okay. Right, that’s just for me, guys. Thanks.
Doug Shaw
Sure.
Operator
Thank you. The next question comes from Saket Kalia from JP Morgan. Please go ahead.
Saket Kalia – JP Morgan
Hi, guys. Few questions from my side.
Doug Shaw
Hi.
Saket Kalia – JP Morgan
So, the $1 million reduction in guidance from FX was most of that realized in this quarter?
Scott Landers
No. It was about 250 this quarter and as we project out the rate that we assume that the average rate we’ve had in Q2 was to continue through the rest of the year and we compare that to last year’s rate socket. It’s about a $1 million delta.
Saket Kalia – JP Morgan
Got it. That answers my second question. If I go back to last quarter’s transcript, I think Scott the way that you said a good way of thinking about the full year guidance was to take the first half kind of run rate annualized plus some prepayments.
Scott Landers
Yes.
Saket Kalia – JP Morgan
And I guess I just want to clarify. The prepayments that you were talking about last quarter are those kinds of the same ones that you’re talking about this quarter with the other OEM paying the Q3 and Q4?
Scott Landers
Yes, they’re included in that number.
Saket Kalia – JP Morgan
Got it. And last question from my side. So, Web Fonts, I know that it went into beta last quarter, but when is it going to be available and I know you’re looking for 7,000 fonts by the time it’s available. You had 2,000, I think last quarter. Where do you stand right now?
Doug Shaw
We’re definitely on track for the 7,000, so we’ll be in good shape. And as far as the exact date of the launch, we’re kind of keeping that close to the vest for competitive reasons, but we are saying it’s this year.
Saket Kalia – JP Morgan
Got it. Thank you.
Doug Shaw
Sure.
Operator
Thank you. (Operator Instructions). There appears to be no further questions. Please continue with any other points you wish to raise.
Doug Shaw
Okay. All right. Well, thank you. I would like to thank you all for joining us today and we appreciate your continued support of Monotype Imaging. Enjoy the rest of the summer and we look forward to speaking with you soon. Have a good day.
Operator
This concludes the Monotype Imaging Q2 2010 Conference Call. Thank you for participating. You may now disconnect.
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