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Executives

Staci Mortenson - ICR

Dough Shaw - President & CEO

Scott Landers - SVP & CFO

Analysts

Ralph Schackart - William Blair

Richard Davis - Canaccord

Matthew Kempler - Sidoti

Ross MacMillan - Jefferies & Company

Steven Frankel - Dougherty & Company

Saket Kalia - JPMorgan

Monotype Imaging Holdings Inc. (TYPE) Q3 2010 Earnings Call November 2, 2010 8:30 PM ET

Operator

Welcome to Monotype Imaging Q3 2010 conference call on the 2 of November 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, madam.

Staci Mortenson

Thank you and good morning everyone. Thank you for joining us for Monotype Imaging second quarter financial conference call. With me this morning are Dough 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 third 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, November 2, 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 third 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 principles. 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 and Presentations in the Investor Relations section of our website at www.monotypeimaging.com. The call will be archived on our website for one year.

And now, I'd like to turn the call over to Dough Shaw.

Dough Shaw

Hello and thank you for joining us this morning. Monotype Imaging had a very strong third quarter with double-digit growth across key operating metrics including revenue, operating income and net adjusted EBITDA. Total revenue was $28.4 million, a 23% increase year-over-year. Net adjusted EBITDA increased 31% to $13.4 million representing a 47% margin.

Our business continues to generate significant cash flow. During the quarter, cash flow from operations was $13.8 million. Year-to-date, cash flow from operations was $35.7 million, an increase of 60% compared to the first nine months of 2009.

Now I'd like to provide highlights of our OEM and creative professional businesses. Starting with OEM, we achieved record revenue of $21.5 million, a 32% increase year-over-year. We posted double-digit growth in both our printer imaging and display imaging businesses.

We experienced ongoing recovery in laser printer units as well as increased volume in our printer driver business, enabling us to outgrow the market as we’ve done historically. Our display imaging business experienced growth across the board, driven by existing customer deployments and recent design wins. We also secured our first graphical user interface design win since acquiring Planetweb.

Turning to Creative Professionals, we reported $6.9 million in revenue, a 3% increase year-over-year and a 14% sequential increase. This was our best creative professional quarter in nearly two years. Our direct business continues to improve and with the commercial launch of Fonts.com Web Fonts, the long-term growth prospects for our web business are strong.

Now I would like to spend a few moments on some of our key initiatives beginning with our printer imaging business. Over the past several years, the embedded font standard for laser printers has been 181 typefaces in support of the PCL and PostScript Page Description Languages.

However, as new printers hit the market with capabilities such as global printing and Cloud-based printing, but font standard is increasing. Along with 181 core fonts, printer OEMs are turning to us to embed the new Microsoft Office default fonts, the on-delay and WorldType font collection for global printing, and a hardly tuned fonts for control panels and a collection of typefaces help facilitate in mobile printing all for Monotype Imaging. Our sales force is actively promoting this significantly increased laser printer standard, and we anticipate adoption by the market leaders over time.

Turning to another new area of growth for our printer imaging business, several OEMs are evaluating our Page Description Language or PDL solution, which we announced in July. Our embedded PDL offering is designed to enable highly efficient superior quality end-to-end printing.

OEMs are able to differentiate their products through built-in print management functions. And the other device categories RIM, one of the world's leading smartphone manufacturer is now shipping our fonts in Blackberry devices and as we’ve reported in the past we continue to work closely with leading e-book reader manufacturers such as Amazon. Our font solution ships in the latest Kindle which have received excellent review for its readability. IDC predicts that the e-reader in tablet market will grow from above 12 million units in 2010 to more than 50 million units in 2014. Our focus remained strong in this area as our operating could be a key differentiator for these customers.

During the third quarter, TomTom a world leader in location and navigation devices begin to ship products for the font solution for monetized imaging. We now have relationships with two of the top GPS companies in the world, Garmin and TomTom.

Turning to graphic user interfaces, we are pleased to have captured our first design win since acquiring Planetweb last December. Our SpectraWorks user interface solution was chosen by a major manufacturer for the camcorder product line.

Moving to Creative professional, we are excited about the recent commercial launch of Fonts.com Web Fonts, our cloud-based service that allows high quality fonts to be used in the web. We believe that we offer the best selection, the best language support and the best work flow solution of any web font service.

Our offering now has over 8000 fonts including exclusive type phases that are widely used in branding and advertising such as Helvetica, Frutiger and Univers. More than 40 languages are supported including Chinese, Japanese and Korean. Text displays instantly using our patent-pending dynamic sub-setting technology. Unique to our service we also provide downloadable fonts for the creation of web page mark ups. By using the same type-based designs that are specified in a web designed product, mockups can be created in applications such as Adobe Photoshop and Illustrator.

Media reports and customer feedbacks have been extremely positive and we are counting this momentum into new directions. We adjusted amounts of new API which allows developers to integrate our fonts into web applications, enabling users to tap directly into our solutions. In addition, new plug-ins are available for WordPress, Drupal and Joomla, three of the leading open source content management systems.

Now customers are able to create websites using our service on within these solutions making it even easier to use. Our web fonts service represents an important long-term growth driver for our business. Our subscription model targets every kind of user from Fortune 1000 companies that generates certain skin, web site traffic to blogs and smalls businesses.

Overtime, we expected goals highly visible, reoccurring revenue in the trade to professional portion of our business. During Q3, we also announced a multi-year front license agreement with Gannett, an internal news and information company, operating on multiple platforms including the internet, mobile phones, newspapers, magazines and TV stations. They wanted full access to the monetized and ITC font libraries, we use to print in digital media.

With this agreement, Gannett will be able to deliver consistent, branded content using our fonts across their entire organizations. Gannett advertisers will also be able to select fonts to support their own recognized brands as well as create compelling advertising contents.

Now, I'd like to turn to your outlook for the remainder of the fiscal year. We are pleased with the results for the quarter. We saw significant year-over-year growth and revenue profit in cash flow. We’ve adjusted full year guidance to counter the strength of our first three quarters performance. We are now targeting revenue in the range of a $112.8 million to a $106.3 million or 11 to 13% growth and expect net adjusted EBITDA of 46.5 to $47.5 million or approximately 45% of revenue.

In our OEM business, we anticipate double-digit growth from the fourth quarter driven by a continuous strength of our printer and display imaging businesses. In Creative Professional for the full year we anticipate year-over-year growth in the mid of single-digits. With the general availability of our new Web Font solution we are increasingly confident about the future businesses.

I would also like to give some high level direction on our outlook for 2011. Looking at our OEM business we experience a significant rebound in laser print units in 2010. IDC is currently predicting 8% year-over-year growth in 2011. In our OEM display imaging business we are planning on increased revenues from existing customers to additional unit shipments in expanded deployment, combined with incremental revenue from our new customer design wins.

We expect our creative professional business to generate year-over-year growth as we convert our expanded pipeline into revenue is the early returns from our Web Font service. Based on this, we are expecting 8 to 11% year-over-year revenue growth in 2011. We will continue to invest in support of our growth initiatives such as our Underlay and WorldType collection, Page description Languages, Rapid User Interfaces and our Web Font service. Inclusive of these incremental investments we expect 2011 net adjusted EBITDA margins of 44 to 45%.

Overall, we are quite pleased with our progress in 2010 and we feel we are well positioned for future growth. We intend to give more detailed 2011 guidance on our yearend earnings call. With that I would like to turn the call over to Scott.

Scott Landers

Thank you Doug and good morning everyone. I would like to start by reviewing Monotype Imaging’s financial performance and then provide more detail on our outlook. Revenue for the third quarter was $28.4 million, an increase of 23% compared to the prior year. During the third quarter, our OEM revenue increased 32% to a record $21.5 million. Both our printer and display imaging businesses experienced double-digit growth.

On the printer side, growth was driven by the continued recovery of our laser printer unit as well as our ability to leverage incremental IP to our installed customer base. Our display imaging business saw increased revenues from multiple sources. Existing customers shipped more units and we’ve begun to generate revenue from recent design wins in the mobile phone and e-reader categories.

Our Creative professional revenue was 6.9 million, up 3% compared to the prior year and 8% on a constant currency basis. Revenue increased 14% sequentially. We are encouraged by our best creative professional performance in almost two years. Our direct pipeline continues to improve and is translating into increased revenue. Our Web business is also growing and we are excited about the long-term prospectus of our Web Font service.

Gross profit margin for the quarter was 90.5% of sales, an increase of 190 basis points compared to the prior year and slightly above our target model of 88 to 90%. The increase in gross margins was due to a greater percentage of revenue coming from our OEM business. Operating expenses totaled 16 million during the third quarter representing a $2.1 million or 15% increase from 2009.

Operating expenses increased primarily due to variable compensation associated with higher revenue and profit. Operating profit for the third quarter was $9.7 million representing a 34% margin and a 49% increase over the prior year. Other expense of $1.5 million was mostly related to interest expense on our debt. Our tax rate for the quarter was 28% compared to our expectation of 38%.

The difference was primarily due to an R&D tax benefit we realized during the quarter. The tax rate benefit had a positive $0.02 impact on EPS. We generated earnings of $0.16 per diluted share compared to $0.08 in 2009. Net adjusted EBITDA increased 31% to $13.4 million, representing a 47% margin.

All of our profit metrics for the third quarter were company records and highlight how our model works. We made significant upfront investments with our customers and to the extent we drive revenue growth in excess of 10%, we should experience an acceleration on the bottom line. Cash flow from operations was $13.8 million for the third quarter and $35.7 million on a year-to-date basis which represents a 60% increase from the first nine months of 2009. During the quarter, cash was driven by increased profits and a prepayment from one of our OEM customers. We continue to strengthen our balance sheet in the third quarter. Cash and cash equivalent at quarter end stood at $54.6 million, a $20 million increase over yearend.

Total debt outstanding was $78.5 million which represents a decrease of approximately $12.8 million from year end. Net debt was $23.9 million compared to $56.7 million at the end of 2009. We are scheduled to pay down an additional $2.9 million of debt in 2010.

Now turning to our outlook; for the fourth quarter we expect total revenue of 27.5 to $29 million, gross margins to approximate 89% and operating expenses to be in the range of 15.5 to $16 million. We anticipate net adjusted EBITDA to be in the range of 12.5 to $13.5 million reflecting a margin of approximately 46%. We expect EPS in the range of $0.12 to $0.14 per share.

Our Q4 revenue guidance calls for revenue growth of 10 to 15%. Growth is expected in both our OEM and creative professional businesses. For the full year 2010, we anticipate total revenue of 104.8 to $106.3 million which represents growth of 11 to 13%. Gross margin should approximate 89 to 90% and operating expenses are expected to be $62 million.

We anticipate net adjusted EBITDA to be in the range of 46.5 to 47.5 million which represents a margin of approximately 45%. We anticipate EPS of $0.46 to $0.48 per share. And finally we anticipate our full year tax rate to be approximately 33 to 34%.

2010 is exceeding our expectations. Our existing markets have rebounded and we’ve leveraged our investments over the past 18 months to deliver new value to our customers. Our long-term growth prospects span all of our businesses and our cost structure is aligned to deliver solid profit margins.

In closing, we would like to reiterate our high level view for fiscal year 2011. We are planning for revenue growth of 8% to 11% fueled by a continued growth from our core and early returns from our targeted investment areas. We anticipate net adjusted EBITDA margins of approximately 44% to 45%. We will provide further insight on our next earnings call.

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). The first question comes from Ralph Schackart from William Blair. Please state your question.

Ralph Schackart - William Blair

Just first, there was some upside relative to our model and the OEM licensing side of the business. Doug you gave some color on the call. Was there any sort of pocket of strength either in units that were little bit higher than expected, better job going deeper with existing customers and perhaps just give us a little bit of color what was driving from the upside?

Dough Shaw

Ralph, it really was across the board. On the printer side, as you know we get our royalties one quarters and arrears, so what we received was the uptick the whole printer industry had in their Q2 we saw in our Q3 royalties. So we enjoyed that increase in units.

And then on our display imaging business, really across all the different devices e-books, mobile phones, GPS devices, we saw units go up, we saw deployment spread out within the accounts. So we had several OEMs that are actually licensed additional technology and pushing up the per unit royalty. So even the ISV which has been kind of sleepy for us in prior quarters, that had an uptick. So, it was one of these quarters where there wasn’t a lot of bad news, there was good news across really the entire OEM front and see [repeated] increase at a huge rate, only 3%, but it showed nice sequential growth from the prior quarter.

Ralph Schackart - William Blair

If you look at some other sort of end markets within consumer electronics particularly PCs and HDTV, there certainly was sort of a, I don’t know if channel stuffing is the right term, but there seem to be sort of a fall off after the summer months in terms of unit demand. Are you seeing that at all with printers or has it been sort of linear through out the year?

Dough Shaw

Really haven’t seen it all. We received quite a few of the printer royalty reports, other OEM reports like in the mobile phone or maybe GPS, we still have more to come in, but on the printer side it still stays very, very strong.

Ralph Schackart - William Blair

On Q4 you talked about and the 15% guidance and then appreciate you gave us an outlook for FY '11 but it was on the 8% to 11% range. Is there anything sort of factored into FY '11 other than conservatism besides strength that you are seeing currently?

Dough Shaw

As you know, in the past what we’ve done particularly on the printer business is we relied on industry reports. So IDC is full use primarily, and what they have talked about is about 15% unit growth from the printer market this year with 8% growth next year, these are a bit dated numbers. I think we got these sometime like in August? Yes, September-August timeframe. So we use that plus of course talking to our customers and see what they’re saying. So it just seems prudent that this time, not use that kind of growth rate and then as we learn more from our customers and gather refresh from IDC, we'll better update that number. And then the rest of our businesses are willing to anticipate or grow at double-digit, and if you do the math and 8& to 11% seems like a prudent guidance as we stand today.

Scott Landers

And Ralph, this is Scott. I think its high level guidance, we are going to provide more details. Really coming off these last three years where we had the economic decline in 2009 and now the rebound, we’ve thought it was prudent to give you guys the high level view of what we are planning to. Typically, we wouldn’t do that for another quarter out. But you know, we're happy to see, have a guidance range that includes double-digit which is our annual goal to grow the company double-digits organically and then we're making significant investments and still intend on driving really strong EBITDA margin. So it's just a high level outlook which will give you a refresh next quarter.

Operator

Your next question comes from Richard Davis from Canaccord. Please state your question.

Richard Davis - Canaccord

I was out on the West Coast and everyone's regard with the iPad and suppose it will be over here in the East Coast as well. What is your relationship with that, because one of the concerns I got from investors was it like, oh my gosh if iPad takes over the world, that’s actually a negative for Monotype. I tried to dissuade them of that opinion but help me out kind of how you guys think about your relationship with them and what impact if any it has to your thought process?

Dough Shaw

It's a couple of folds. So we've been working with Apple way, way back to the first introduction of their operating system, and over the years particularly our Linotype subsidiary, they have licensed a series of typefaces, will that occur in a lot of other very popular publishing fund. Two, to Apple, no technology though, its strictly the typeface. It has outperformed a few companies that has their own font scaling technology. So we receive a nice annual payment from Apple that’s grown over the years but does not scale with units.

So irrespective if one iPad ships or 20 million we get the same amount of money. So we can’t write that influx. What the positive slant that we put on is though is it’s an excellent platform for us to go to all the other companies that want to be in the tablet business and say do you want your users to have the same kind of experience from a typographic standpoint. We supplied Apple with virtually all of their typefaces, take a look at what we have to offer. We also think it’s a just a great platform for e-books so it shows people that you can read books online that the eye strain is becoming less of an issue because of high resolution screens and the more people that read online just helps us.

So we’ve got this nice relationship with Amazon, with Barnes & Noble [on the nook] and even though we are not getting any incremental money from Apple they are helping educate the market about reading things like that online

Richard Davis - Canaccord

Got it, is there operating leverage on the margin side with regard to creative professional and as much that’s kind of more almost a consulting operation in some respect. Or is that something that’s just kind of obviously it’s baked into your guidance but is there upside of those numbers does that business breaks better than expected.

Scott Landers

The answer is yes, what we try and say overall in our model we extensively drive revenue growth in excess of 10% more and more that drops to the bottom line and that would be regardless where that came from Creative Professional or OEM. Obviously, on the OEM side more drops but the Creative Professional business can definitely be leveraged. And really as you look out with Web Font services and the investment we are making in that today. And that’s a very, very early days and there, we’re looking to build a recurring revenue stream that would even add more leverage to that model over time.

Richard Davis - Canaccord

And then Jackie Arthur’s not the operator on this call is she?

Dough Shaw

I'm not sure if she is in from (Inaudible).

Richard Davis - Canaccord

It was the same British accent. I couldn’t tell. You know.

Operator

The next question comes from Matthew Kempler from Sidoti. Please state your question.

Matthew Kempler - Sidoti

So I was wondering if you can speak a little bit more about the web front initiatives? Can you talk about how the pricing model is being received so far and where we are in signing up our first enterprise or corporate customers for that and how that stating your expectations for 2011?

Dough Shaw

First, we actually launch the product on September 14th, so we’re about six weeks into it and really we’re in a mode right now of working with large corporations. Fortune 1000 accounts and working with their branding groups to get them to try the products, see what the advantages are to them and then frankly get into your pricing negotiations. It’s early days but what I can say is we’re really happy with the amount of people that have signed up, so we have a free category and we’re upgrading them into a pay category. The pricing model, I think its really too early to tell what the market reactions? I haven’t heard a lot of push back but frankly, this is the first time we’ve done a subscription model.

So we’re going to listen to the market and if the market, six months from now says you know what, maybe there’s two tiers because of the paid up fee for certain amount of funds and there’s an ongoing subscription, we’ll be flexible there but early days are is been received fine. But our press has been very kind to us, but there are people that look at our competitors versus what we are offering will not be offices and open standard other people can do this as well. And we really think we have a pretty compelling value proposition. So right now I am giving you a lot of generic detail, it is doing exactly what we had hoped out of the gates. The revenue is immaterial, because it’s a subscription one. Next year's guidance really didn’t have a lot of money in it, but we do think over time that really can scale to a significant business for us.

Matthew Kempler - Sidoti

Okay. And when you look out 2011 in the high level guidance that management just gave, is there an expectation that we're still benefiting from a pent up corporate research cycle or is that more about existing business and then the new design wins kicking in?

Dough Shaw

Because we will see this nice rebound on the printer side and we are expecting it to grow next year but not at the same rate of this right now. We think it's kind of business as usual next year, but we enjoyed a little bit of an up tick this year from a percentage increase in units and now going forward that 8% number feels like it's real. And then as we sign up other CE manufacturers and they deploy we'll write that as well. So I don’t think it’s an artificial jump off. I think it’s a new base full growth on.

Scott Landers

Just overall with the entire business, if the printer is one category and not to get into too much detail but we feel pretty good about how the pipeline is rebuilt in our CP business. We are seeing more and more closures there and in our display imaging business, we had a handful of design wins here over the last 18 months which are in early days and actually starting to produce some evidence. So we feel good, it’s in line with our goal of double-digits and we will give you more color in four months.

Matthew Kempler - Sidoti

It looks like deferred revenue jumped sequentially in the third quarter which isn’t typical as far as I recall. Was there something special that happened there?

Scott Landers

You are right on top of things Matt, so typically we would get a prepayment from a customer usually one in Q1, one in Q2 and that would be it for the year. We also received a prepayment this quarter in the third quarter is about $4 million and that also helps out the cash flow. So we had really strong cash without it coupled with it, we are now up to I think $36 million in cash flow from operations for the year. So this year it was a little bit different and we now have one in the third quarter where we typically did not.

Operator

The next question comes from Ross MacMillan from Jefferies & Company.

Ross MacMillan - Jefferies & Company

Dough, when you talk about the expanded font set for the laser printer market, is the notion here just to continue use that as a mechanism to sustain the unit pricing you’ve achieved or if I look at that is there a chance that could actually increase unit pricing that would be the first question.

Dough Shaw

It’s a good question, this is a new phenomenon for us. So I think as you appreciate over the years we’ve been upgrade the number of fonts that ship in the printer and it literally grew from 12 at one time to 45 to 136, now at 181. And the way our businesses kind of worked is that the royalty, well let’s say for 136 fonts up to 181, we had a short-term increase in royalties, but through negotiations that kind of went away. So we’ve been able to keep our royalties flat on a dollar basis over the last five, six years.

We think it’s different now. When we look at the new fonts that we’re promoting, I mean this worldwide font we’re promoting, Underlay and WorldType, that’s a 50,000 character font, but so we’re expecting a significant increase in royalties for people that embed that. You need a hard disk than that printer because it takes up a lot of data even though we do ship it in a compressed format, but 30% of laser printers have hard disks.

So that’s an opportunity. We think of people who want to embed the windows to Fall Fonts which are Cambria and Calibri. For performance reasons, we think that deserves a significant or it deserves a nice premium on the royalty because that will be the most used fonts in the world now because of the default fonts.

And then we look at our control panel solution. We get a nice incremental royalty there and then mobile printing. So really to add it all up and our sales force for the first time and the printer side in a while will be in a position where we really tend for OEM’s that want to ship this, get a nice incremental royalty that we don’t discount away. I mean that should stay with us for quite a while.

Ross MacMillan - Jefferies & Company

And just given the length of the sales cycle, is that something that you’ve included in any of your thoughts for next year? It doesn’t sound like it, but I was just curious.

Dough Shaw

I hope we get a little bit of pick up in the tail end of the year, but the realities if an OEM said yes today, it would take them six months minimum to put it into a firm for probably nine months. And that means really the second half to last quarter next year. So just being prudent, it is very little on the forecast for next year in this. We think it’s something that will see a pick up, a year and half, two years from now.

Ross MacMillan - Jefferies & Company

And then just on the PDL side, I know it's still early there as well. But that’s incremental to this font bundle expansion. So am I right, I am right in thinking that that could be and it is successful, that would be further incremental on a material standpoint?

Dough Shaw

That’s exactly right, and our value proposition there really is that we’ve taken a lot of the technology they already had in our printer driver side, not only that the page description languages support, but our color technology and have brought it down to an embedded world for PCL and XPS. And the status as we mentioned in the kind of canned script here was that, we’ve got upwards, I don’t want to exaggerate, but I will say six to 12 major OEMs evaluating the product getting positive reinforcement.

And frankly our class are much, much less than the class of our competition. So we are in a position where we can hopefully offer a better product at a very, very competitive price. So we can couple those two things and it’s the same sales force is selling it. So there really is no lot of variable costs involved in this or additional costs involved in this.

Scott Landers

One of the things we also like about these different growth initiatives is that, before people used to just think of us as having an opportunity in our display space. But now we have these incremental opportunities that exist in printer, incremental opportunities in display space with new devices as well as user interfaces and then in our CP business with Web Font services. So I think it’s the first time in a long time that we have real incremental value to add across the entire portfolio. So we think it’s a good place to be and we are investing in all of them.

Ross MacMillan - Jefferies & Company

Just a couple of very quick ones to finish. RIM, is that just a font relationship and therefore non-royalty paying? And then just very lastly just on the creative pro business. That’s still below your peak, I noticed whereas your OEM business that now exceeded your prior peak. You used to have the lumpy large kind of enterprise deals. I presume they are few and far between these days. Is it fair to say that that’s the case and if you really looked it on a run rate basis, your creative pro business was actually maybe a little better than looks out simply relative to your prior peak. In other words, if you stripped out some of the larger lumpier deals historically, that business is showing clear signs of improvement.

Scott Landers

You are exactly right. So, on the surface you would see 3% growth year-over-year. The first thing its not a huge number but if you factor in currency on a constant currency basis that business increased 8% year-over-year, and last year we happened to have a very large order if you recall in Q3. So I kind of look at the few key business in a different way where last year we were hoping to form a bottom around an average of $6 and $6.5 million per quarter, and we have improved off that by what I would consider 10% because now we're are in a 6.5% to 7% and then we will look to take another step jump next year.

The pipeline is definitely improved. We are seeing an increase in the amount of enterprise deals that we do. And Doug referred to one of them on the call today, the deal with Gannett which was a nice multi-year deal for us, where we are taking the revenue over time. So we are very pleased with the overall CP business both on the direct side and particularly also but the web is growing as well and then again web talked services on top of it.

Dough Shaw

I do think as we’ve talked in the past, there has been a fundamental shift in this business. Couple of years ago I guess 2008 we did $33 million in this business. And that was for purely prints reasons but for print publishing. I can paint a scenario where it gets back to that, that’s hard to seeing going much higher than that. So really our shift as a company is, that’s more and more advertising dollars are obviously going to the web, online advertising. Let’s make sure we’re the leader now and offering Web Fonts for that market. And you add the two business together, and we’re real optimistic that we’re going to go past the $33 million. But all we do is stick to what we used to do. You could say well this could be an ageing business for us.

Operator

The next question comes from Steven Frankel from Dougherty & Company. Please state your question.

Steven Frankel - Dougherty & Company

Scott, when you talked about the third prepayment, is that now on a schedule? So we should think about that in 2011 earnings or was this more of a one-time payment?

Scott Landers

From a cash perspective, I don’t know that we would plan out for next year as of yet. I think when we get into giving little bit more detail on next year’s guidance, we can inform you that the seasonality of some of the revenue contracts as well as some of the cash payments. I wouldn’t say that we would be guaranteed that prepayment next year versus having that customer pay it for, but it’s possible.

Steven Frankel - Dougherty & Company

Do you think your major printer customers are through their supply constraints now?

Scott Landers

I do. When I look at HP's earnings call and I think they had something like, I think it were total market as they had a 40% increase in business printers. I mean that tells the market. I think the Cannon now is supplying them the engines that they need and that all the other formatting boards and all the rest of business suppliers are no longer constrained. I am not hearing any printer manufacturer saying that that is the inhibitor. Those are days are thank goodness behind us.

Operator

The next question comes from Saket Kalia from JPMorgan. Please state your question.

Saket Kalia - JPMorgan

Can you answer the question on the RIM so maybe could talk about Tom-Tom for a second. Can you give us some detail which models you embedded in there? And then just generally speaking you mentioned that in display imaging existing customers sort of expanded usage, what areas of display imaging was that particularly prevalent?

Dough Shaw

Sure. Just one thing on the RIM side, it was a niche product and we would see there a reasonable payment but frankly our goal is fairly transparent. What we want to do is get in there with the solution that makes one product manager happy than use that as an opportunity to vandalize the other product managers and ultimately we think this value to company like [Rambo] having not only funds but also our technology.

So we have our first foot hole in that account but see if we can be successful in spreading out. As far as TomTom, frankly, I don’t know exactly what the product is. I do know that it’s shipping in the market. I know on the garment side, it’s a newly device but I don’t really know what it is with TomTom. And as far as other customers I just look at what we are doing on the eBooks side and on the mobile phone side and without saying exact customer names, our sales force is being successful and upgrading them to additional type basis. So maybe just license our latent solution and now they are adding support for Chinese, Korean and Japanese or maybe whether it was Android phone with some Latin songs maybe they were getting from Asian from us and they now added (inaudible). So it is really an opportunity of licensing more and pushing that per unit royalty up.

Saket Kalia - JPMorgan

Got it, that makes sense. Moving to the printer side, last quarter we talked I guess a couple of large prepayments coming up in the back half looks like you got that in the third quarter. Should we expect the same in the fourth quarter?

Scott Landers

That pre payment didn’t necessarily that doesn’t impact revenue so it’s going to defer second are you referring from a cash perspective or from a revenue perspective.

Saket Kalia - JPMorgan

From a revenue perspective.

Scott Landers

So that’s prepayment that we had gets spread across the year as we get royalty reports similar to the ones we did in the first and second quarter. From a revenue side we are assuming we get some more follow through in the printer side which is assumed in our guidance.

Saket Kalia - JPMorgan

Last question, it doesn’t sound like you have much embedded in your preliminary outlook for ’11 in terms of web fonts. How about PDL because it sounds like you have some traction there.

Dough Shaw

PDL is the same thing, until we get a customer to say yes, we don’t put into our budget frankly or in our guidance so we certainly hope there is and we are go sales force to bring in some incremental business next year. The way it will work though is if the OEM said yes today or early Q1 we will get some six payment some non recurring engineering fees but of course the OEM gain is all about getting per unit royalty. Until you actually the ship the product we won’t see a big ramp. If we think it needs a while to get off into our device and ship the page subscription language is a bigger project. So it just seems prudent that the real upside in that in that business will be in 2012-2013.

Operator

(Operator Instructions). We do have a follow-up question from Ross MacMillan from Jeffries & Company.

Ross MacMillan - Jefferies & Company

Just one for Scott. Just given your cash flow generation, it didn’t sound you like you’d made any change to your plan to pay down on debt, is that the case and just a higher level question on usage of cash as you clearly are exceeding on them, expectation of cash flow generation?

Scott Landers

Since there are intent today to follow the regular paydown schedule which we talked about another three millionish in the fourth quarter and then next year, if you look at our balance sheet, we have about $20 million that we will be paying down next year, but it’s the same story. We do have $78 million in debt which we will chunking off here over the next two years.

We should be in a net cash position mid next year and we’re always looking at M&A opportunities. So we’re really excited about these growth drivers, what we’re doing internally as well what these product market mean to us and to the extent we find acquisition opportunities that help accelerate or provide us with some IP that we don’t have.

We’ll go after it, so without how many specifically, it’s kind of the same plan that we’ve had over the past several quarters.

Operator

There appears to be no further questions. Please continue.

Dough Shaw

Okay. I would like to thank you all for joining us today and we appreciate your continuous support of Monotype Imaging. We look forward to speaking with you soon and thanks again for all your interest, have a good day.

Operator

This concludes the Monotype Imaging Q3 2010 conference call. Thank you for participating. You may now disconnect.

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