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Bitstream Inc. (NASDAQ:BITS)

Q2 2010 Earnings Call Transcript

August 16, 2010 4:30 pm ET

Executives

Anna Chagnon – President and CEO

Jim Dore – VP and CFO

Analysts

George Guffey [ph]

Kenneth Liang [ph]

Operator

Good day, ladies and gentlemen, and welcome to your earnings release conference. At this time, all participants will be in a listen-only mode. But later, we will conduct a question-and-answer session, which instructions will be given at that time. (Operator Instructions) And as a reminder, today's conference is being recorded.

And now, it's my pleasure to announce your host, Anna Chagnon.

Anna Chagnon

Hello and welcome to Bitstream Inc.'s second quarter 2010 conference call. I am Anna Chagnon, President and Chief Executive Officer of Bitstream.

Jim Dore

And I am 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 27A of the Securities Act of 1933 as amended and Section 21E 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 investors not to place undue reliance on such statements.

A short time ago, we reported our results for the second quarter of 2010 with the following financial highlights. Total revenue increased by $186,000 or 4% to $5,435,000 for the three months ended June 30th, 2010 as compared to total revenue of $5,249,000 for the three months ended June 30th, 2009 and $227,000 or 4.4% sequentially as compared to $5,208,000 for the three months ended March 31st, 2010. These increases were predominantly the result of increases in e-commerce revenue for font and OEM revenue for fonts and font technology.

The company’s aggregate cash, cash equivalents, and investments at June 30th, 2010 totaled $12,133,000, a decrease of $5,896,000 as compared to a balance of $18,029,000 at December 31st, 2009, reflecting the use of $6,528,000 of cash to purchase certain assets of Press-sense Ltd. Had the company not purchased the assets of Press-sense Ltd., cash would have increased by $633,000.

Our loss from operations was $714,000 for the three-months ended June 30th, 2010, and our operating income for the three-months ended June 30th, 2009 was $358,000. Our net loss for the three months ended June 30th, 2010 was $685,000 or $0.07 per share, and our net income for the three months ended June 30th, 2009 was $319,000 or $0.03 per fully diluted share.

The loss was primarily attributable to increased operating expenses for our increasing investment in BOLT; costs incurred for the addition of personnel in Israel, Europe, and the U.S. relating to the acquisition; legal, accounting, and consulting fees related to the acquisition of certain assets of Press-sense; and the amortization of intangible assets, primarily acquired from Press-sense.

Our non-GAAP results for the three months ended June 30th, 2010, excluding stock-based compensation expense, the amortization of intangible assets, and the acquisition of certain – acquisition costs for certain assets of Press-sense Ltd., out net – our non-GAAP loss from operations was $94,000 for the three months ended June 30th, 2010, while our operating income for the three months ended June 30th, 2009 was $571,000.

Our non-GAAP net loss for the three months ended June 30th, 2010 was $65,000 or $0.01 per share, while our net income for the three months ended June 30th, 2009 was $532,000 or $0.05 per fully diluted share.

Anna Chagnon

Our revenue growth in fonts and font technology during the second quarter was due to both the continued strength of e-commerce sales of font and the return to growth of our OEM revenue for fonts and font technology.

Revenue growth in e-commerce sales was driven by continued increases in the new user acquisition rate. Over 70,000 new users registered on MyFonts during the second quarter, bringing the total number of registered users to an excess of 1.2 million.

Although growth in e-commerce revenues also decreases our margins, given associated royalty payments, it's exciting to see continued strength in our e-commerce sales of fonts to consumers. The return to growth of our OEM revenue for fonts and font technology is due to key placements in the set-top box, printer, and mobile phone industries. Many of these deals will also allow us to receive recurring revenues based on customer shipments.

The shipment of products containing our fonts and font technologies from deals closed during the second quarter is expected to possibly start as soon as Q4 2010 with the major product shipments occurring throughout 2011. As a result, the reinvestment revenue from these deals is expected to start next year when the underlying products ship to consumers and it becomes bookable revenue to Bitstream.

Our publishing revenues were lower than anticipated during the second quarter for a variety of reasons, including the continuing slowdown in the print industry overall, resulting in decreased – a decreased number of qualified leads and global economic conditions that are causing corporations to spend less money on print and marketing in the near term. We also continue to see a commoditization of web-to-print solutions through inexpensive SaaS offering and the OEM bundling of web-to-print software.

Our plan going forward is to extend the reach of our SaaS offering through sales and marketing efforts to allow customers an easy and less expensive entry point into a Pageflex solution. We consider our development of a SaaS offering and we booked revenue from first SaaS deployment in the second quarter.

We are also pleased that our bid for the assets of Press-sense during the second quarter was successful and we look forward to integrating the iWay products with our Pageflex product line to fuel addition revenue growth in 2011 and beyond.

In the first week of June, Bitstream closed on the transaction to acquire substantially all of the assets of Press-sense for $6.5 million in cash. Shortly after the closing, Bitstream Israel was legally formed and the office in Israel has been designated as an R&D center for Bitstream Inc. 38 former employees from Press-sense have been hired as Bitstream employees. A majority of these are located in Akiva, Israel, while two are in Europe and four are in the U.S.

Through our recent acquisition, we are also in the process of adding major OEM reseller and distribution relationship to our sales channel, which will also help us return to growth by 2011. By fully automating the creation, production, and back-office processes for document orders, we will provide the tools to enable our customers to maximize production efficiency, monitor and reduce costs, and increase profits.

We are also excited to see the phenomenal growth in our BOLT user base during the second quarter. We now have over 10 installs worldwide. This includes doubling our user growth rate from 3.5 million to 8 million users in just six months between January and June 2010. We are now serving more than 10 million pages per day.

All regions have shown strong growth with India recording more than five times growth over the last six months. India, Indonesia, and the U.S. consistently rank amongst the top three countries by installed base, page views, and active users. Feature phones continued to dominate our user base, confirming our strength in the feature phone market segment.

Our user base of over 10 million users worldwide will position us well as we continue to sign deals to monetize our BOLT offering through advertising. Earlier this month and earlier today, we announced two new advertising deals for BOLT.

The first deal is with GetJar. GetJar is the world's largest Java app store with over 70,000 applications available online. BOLT is now in the top 10 application downloads on GetJar, placing it next to applications like Facebook Mobile, Google, Yahoo Mobile, and Opera. Top 10-placement is a nice testimonial to the browser's popularity and the huge interest in BOLT's video capabilities, social media integration, speed, usability, and WebKit-based standards.

In early August, we signed a deal to offer users of BOLT immediate access to GetJar's entire library of 70,000 plus free app mobile application. Subscribers gained immediate access to GetJar's massive library of applications via a GetJar-branded app store link on their Favorites page. Bitstream benefits as any revenue generated through the download of a sponsored premium application is split between the two companies.

We chose to partner with GetJar, first, because they are the most experienced open application catalog working across multiple platforms such as Java ME, BlackBerry, Symbian, and any device and platform used by our customers.

The second deal was with BuzzCity, one of the world's largest mobile advertising networks with over 2,500 publishers across the globe. This agreement will allow us to deliver strategically placed relevant mobile ads using BuzzCity's mobile advertising network and to create a true advertising revenue stream through our free user base.

We chose BuzzCity because the regions in which BOLT has its largest number of users align perfectly with where BuzzCity's ad inventories are also the strongest. In particular, India and Indonesia, two of BOLT's largest markets, are countries where BuzzCity delivers largest number of paid advertisements.

Although the technical work involved with pursuing new advertising arrangements took a few months longer than anticipated, we are happy to report that a major part of the work is done and can be applied to other advertising deals. As a result, we are continuing to pursue monetization of our users with advertising, revenue share on content, as well as work towards a search engine partnership deal. In the end, monetization through mobile advertising and search engines may be what is most important to our success.

In addition to advertising, we continue to pursue monetization through device manufacturers and carriers and we are hiring senior-level talent from the mobile browsing space to help us expand this effort as we continue to make the investments needed to make this product successful.

Our OEM relationships have yielded over 0.5 million new downloads and we are starting see some modest from deployments through OEM. Since we are offering BOLT as a service to OEMs with Bitstream responsible for the hosting, we will need to spread recognition of this revenue across 18 to 24 months. Although it is expected that this will create a growing and predictable piece of revenue over time, in the near term, immediate revenue will be modest as a result.

On Friday, we also announced the resignation of Charles Ying as Chairman of the Board due to a serious illness. We fully support Charles’ decision to resign as Chairman so he can devote all of his time and energy toward improving his health. The company wishes to thank Charles for all of his 13 years of distinguished service and commitment to the company and its shareholders, both as Chairman and previously as CEO. He has been both a technology leader and an innovator and his work over his tenure at the company diversified the company’s technology and business offerings. He will be greatly missed and we all wish him the best with his recovery.

Amos Kaminski, long-standing Bitstream Board member and previous Chairman of the Board, has been selected as Mr. Ying’s successor. We are fortunate to have Amos fill the role of Chairman. He has been a key Board member and contributor for many years and his selection will help take our newly expanded company into the next phase of international growth and development. He has been instrumental in assisting our team with the recent acquisition in Israel, where his knowledge of the people and the culture played a crucial role in our decision to expand our business internationally.

In summary, we see 2010 as the transitional year for Bitstream. While we are making the investments in personnel and software necessary to monetize our BOLT browser offering through both OEM deals and advertising, we have also expanded our publishing team and the reach of our publishing products internationally through our recent acquisition.

As we continue to solidify and grow revenues from these two major initiatives, we do expect to have continuing losses for the remainder of the year, but we feel the revenue potential for Bitstream in the long term through both initiatives is worth the short-term investments.

We thank you for your continued interest in Bitstream, and we look forward to answering any questions you now have.

Question-and-Answer Session

Operator

Okay. (Operator Instructions) Okay, I'm showing a couple of questions in the queue. Our first is coming from George Guffey [ph].

George Guffey

Hi, Anna.

Anna Chagnon

Hi, George.

George Guffey

Hi. Did you say you were going to – this is not my question, but at the end, I think you said you are going to lose money for this quarter and the next quarter as well?

Anna Chagnon

Yes, because of the acquisition and us staffing up in Israel as we are getting revenue deals done.

George Guffey

Okay. Now, two questions I have here. The OEMs, how many phones did they deliver? Did you say 500,000 that they got out the door?

Anna Chagnon

Yes, it was over 500,000 units shipping with our technology on them.

George Guffey

Yes, okay. So – I mean, that would – that revenue will show up in this quarter, is that correct?

Anna Chagnon

Well, some of those units were actually OEM deals that were done with free units at the start, which after a certain number of units became actual revenue producing units and some of those are units that shipped in the early part of Q3 that won't be reported to Q4. So this is actually shipments to date of OEMs starting in the beginning of Q2 through now. So some of those will show up in Q2 and some of those will not show up in Q2, but because we have to spread the revenue over between 18 and 24 months, it will be modest at first, which is what my comment was about the revenue recognition.

George Guffey

Okay. Are you looking for them to be shipping at the rate of 500,000 a quarter or more than that or what?

Anna Chagnon

My hope is that increases over time. That was – that was – those were the initial deployments and we have other things in the works.

George Guffey

BlackBerry has gotten a new browser. That was one of your main users. I mean BlackBerry converting over to – getting away from the OEMs, converting over to your browser. Now, with their new browser, is that going to take away quite a bit of business that you had there with the old BlackBerry browser?

Anna Chagnon

We don't think so at this point. I mean, it remains to be seen, but we're – we are really predominant if you look at our 10 million installs to date on feature phone as opposed to Smartphone. And although a lot of our Smartphone users are BlackBerry users, it's still a relatively small percentage of our overall user base. But it does remain to be seen what the advances in the BlackBerry browser will do to acquiring new BlackBerry users. So we are keeping an eye on that situation, but it – we don't know yet.

George Guffey

Okay. One last question. You had said last – three months ago that you had expected before that quarter was over, which would have been the end of June, to have announced two more OEMs and there has been none since then. Can you say answer – can you say something about that?

Anna Chagnon

I actually – if I remember correctly, I actually did not specify two OEMs. I mentioned two advertising deals. And that is GetJar and BuzzCity which, as I mentioned in my summary, we were a couple of months behind at getting those deals done because more work on the technology needed to be done to able to capitalize on advertising. And now that work is substantially complete.

George Guffey

Okay. Well, let's put it his – let's put it this way, that it's been over six months since you have had an OEM. What is happening in that area?

Anna Chagnon

We are working with – we have a couple of OEMs that we are working very diligently with, but it takes a long time to process an OEM through the system. And there is a lot of work to be done technologically to work on their devices and also to integrate to their billing systems and integrate to their processes. So we are in the middle of working with a couple of major players.

George Guffey

You don't have anything near term that you think will come out?

Anna Chagnon

I can't say anymore than that.

George Guffey

Yes. Thank you.

Operator

Okay. Thank you. And our next question is coming from Kenneth Liang [ph].

Kenneth Liang

Yes, hi. Most of my questions are also related to the BOLT browser. But one of them wasn't asked or answered and that is, what kind of dollar revenue would 0.5 million shipments result in?

Anna Chagnon

It's really hard for us to monetize that today over the phone because of the nature of the deals that we are doing and the nature of the non-disclosure agreements that we have. What we have said in the past – and again, there are units in those units that are free units as opposed to paid units, partly because we were pushing deals out that contained advertising revenue that will get compensated on advertising, not on shipments. But that being said, we have quoted some rates. It is per unit, between $0.15 to $0.30, up to $0.50 a unit. But again, those units we can't monetize for you today.

Kenneth Liang

Okay.

Operator

Okay, thank you. And at the moment, I am showing no further questions. Again, Anna, I am showing no further questions at this time. Do you have any concluding remarks?

Anna Chagnon

Okay. Well, thank you all. I – if you have any further questions, please let us know. We look forward to speaking with again next quarter.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect and have a great day.

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