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Bitstream, Inc. (NASDAQ:BITS)

Q3 2010 Earnings Call Transcript

November 15, 2010 4:30 pm ET

Executives

Anna Chagnon – President and CEO

Jim Dore – VP and CFO

Analysts

Kenneth Lee – RBC Capital Markets

Matt Spratford – Sidoti & Co.

George Gosbee [ph]

Operator

Good day, ladies and gentlemen and welcome to the earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

I would now like to turn the call over to Anna Chagnon.

Anna Chagnon

Hello and welcome to Bitstream Inc's third 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 of 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 listeners not to place undue reliance on such statements.

A short time ago, we reported our results for the third quarter of 2010 with the following financial highlights. Our aggregate cash, cash equivalents and investments as of September 30, 2010, totaled $12,609,000, an increase of $476,000 from a balance of $12,133,000 at June 30, 2010 and a decrease of $5,420,000 as compared to a balance of $18,029,000 at December 31, 2009, reflecting the use of $6,528,000 in cash to purchase certain assets of Press-sense Ltd during the second quarter.

Our third quarter revenue increased by $322,000 or 6% to $5,982,000 for the three months ended September 30, 2010, as compared to total revenue of $5,660,000 for the three months ended September 30, 2009, an increase of $547,000 or 10% sequentially as compared to $5,435,000 for the three months ended June 30, 2010. At our current size, revenue may vary quarter-to-quarter due to the timing of license agreements.

Our Type OEM and Pageflex publishing revenues continue to be affected by global economic concerns, and a decrease in consumer spending causing delays in the licensing of our software products as well as decreases in royalties received from shipments of consumer products in the previous quarter. Our Myfonts.com e-commerce sales, however, continue to recover, recording a substantial increase, resulting in a $448,000 increase of our direct licensing revenue or 16% as compared to the third quarter of 2009.

Our loss from operations was $1,091,000 for the three months ended September 30, 2010, and our operating income for the three months ended September 30, 2009, was $536,000. Our net loss for the three months ended September 30, 2010, was $1,174,000 or $0.12 per share. And our net income for the three months ended September 30, 2009 was $519,000 or $0.03 per fully diluted share.

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

The increase in e-commerce sales during the three months ended September 30, 2010, led to an increase in third-party cost of revenue consisting primarily of royalty expenses of $503,000, or approximately 30%, as compared to the quarter ended September 30, 2009. Cost of license revenue as a percent of license revenue was 50% for the third quarter, an increase from 39.4% for the third quarter of 2009.

Our product mix fluctuated between products bearing various royalty rates and our e-commerce revenue has higher cost associated with them than our Type revenue and publishing license revenue growth, we expect that cost of licenses as a percent of sales will continue at a level above that reflected for 2009. And will continue higher until such time as revenue from our OEM Type, Pageflex publishing and browsing license revenue increase relative to the increase in e-commerce revenue.

For Q3 2010, cost of services as a percent of revenue from services was 42%, a decrease from 44% from the third quarter of 2009, primarily due to the deployment of consulting personnel onto research and development projects.

Our services infrastructure has remained relatively unchanged during the past year.

Anna Chagnon

Our revenue growth in fonts and font technology during the third quarter was due to both continued strength in e-commerce sales of fonts, strong royalties from OEM font deals and a closing of a major OEM deal with one of the largest electronics manufacturers in the world.

Revenue growth in e-commerce sales was driven by continued increases in new user acquisition rates, almost 70,000 new users registered on MyFonts during the third quarter, bringing the total number of registered users to almost 1.3 million. Although growth in e-commerce revenues also decreased our margins, given associated royalty payments, it is exciting to see continued strength in our e-commerce sales of fonts to consumers.

Our OEM revenue for fonts and font technology contain key placements in the set-top box, printer and mobile phone industries. Many of these deals will also receive recurring royalties based on customer shipments that are expected to start at the end of 2011, or the beginning of 2012. As a result, the real benefit in revenue from these deals will start when the underlying products ship to consumers and the per unit royalties are received from Bitstream.

Our Pageflex publishing revenues increased compared to the second quarter, as we saw increased direct sales of our web-to-print products and the addition of OEM revenue from our new iWay product, which we acquired in June 2010.

Direct sales increased due to an increased number of placements of Pageflex products, a trend that has continued into the beginning of the fourth quarter. We've also recently heard comments from customers and prospects that they are seeing improvements in their businesses and becoming more willing to commit to technology purchases.

We received our first revenue from OEM sales of iWay for products sold during June 2010. Although a portion of our new OEM revenue must be spread over a five-year period, due to ongoing support obligations, we were able to newly [ph] book a portion of this revenue as well.

Two major OEMs have just begun to relaunch their products containing iWay, based on agreements signed during the third quarter. Although it will take time for the channels to begin closing new sales and for revenues to increase, we're happy to report that all parties are moving ahead with us as anticipated, which is a major win for Bitstream.

We are also excited to see excellent growth in our BOLT user base during the third quarter. We now have over 13 million installs worldwide. We also saw an approximately 20% increase in new page views during the third quarter and we are now serving over 12 million page views per day. All regions have shown strong growth, with India, Indonesia and the United States consistently ranking as the top three geographies for BOLT usage each quarter.

We are setting to monetize BOLT through advertising revenue. As you know, we announced deals with BuzzCity and GetJar in August. We have completed the work to launch both advertising arrangements and they are just starting to produce revenue. Although revenues were still small, as we are only showing ads in approximately 1% of our pages, expected increases in the number of ads served and an increase in user base should combine to make this a material portion of our future revenue.

In addition to advertising, we continue to pursue monetization through device manufacturers and carriers. And we have recently hired senior talent from the mobile browsing space to help us expand this effort. One of the deals we signed at the end of last year is getting ready to deploy BOLT in South America.

We also made substantial progress on additional deals that are getting close to deployment. Although the process has taken longer on the OEM side than we would have liked, the opportunities for BOLT are strong and new deals are close to completion.

Since we're 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.

In September 2010, a special committee of the Board of Directors was formed to interview and select the financial advisor. Based on their recommendation, the company engaged Rothschild, Inc. to advise the company with respect to business opportunities and strategic opportunities for the company, aimed at enhancing shareholder value.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Kenneth Lee.

Kenneth Lee – RBC Capital Markets

I'd like to ask Anna if she thinks it's in the best interest of the stockholders to sell the company now and to explain the answer.

Anna Chagnon

I don't think it is something that I should be discussing at this point in time. Thank you for your question.

Operator

(Operator Instructions) Our next question comes from Matt Spratford.

Matt Spratford – Sidoti & Co.

Hey guys. How are you doing?

Anna Chagnon

Good. How are you?

Matt Spratford – Sidoti & Co.

Good, thanks. I was just wondering if you could comment a little bit more on the measure of your relationship with Rothschild.

Anna Chagnon

I believe I made the comments that we are going to make at this time. We have re-engaged them to provide strategic advisory services and that is the extent of our public comment on it.

Matt Spratford – Sidoti & Co.

Okay. Thank you.

Operator

The next question comes from George Gosbee [ph].

George Gosbee

Hi.

Anna Chagnon

Hi, George.

George Gosbee

How are you? I have two questions. One about Pageflex and one about BOLT. Do you want them both at the same time, or do you want –

Anna Chagnon

Go ahead.

George Gosbee

Two conference calls ago, you announced a purchase of PressSense and also said there was new business coming into Pageflex division in the second half of the year. When do you expect this new business to happen and when dose PressSense begin adding to revenue and what are the near-term estimates of growth for earnings in this combined Pageflex?

Anna Chagnon

As I mentioned today, we have received revenue in the third quarter from the sale of iWay through OEMs for June 2010. Part of that revenue was spread and part of that revenue was taken. So we already have received revenue from the acquisition. That was for the product that we acquired.

We are not giving go-forward estimates on profitability, et cetera, as we’ve discussed in the past.

George Gosbee

Approximately, six months ago, you decided to start staffing up the BOLT business and about four months ago you announced BuzzCity agreement for advertising on the browser – BOLT browser. When do you expect these new hires to sign OEM deals? They haven't signed any since you had them on for some time. When can they sign other advertising agreements and generate any other revenue? I haven't seen whether these people have done anything as yet and when do you expect the advertising revenue on OEM royalties to be enough so that the BOLT division will show a profit?

Anna Chagnon

Again, we don't provide segment reporting detail on profitability of individual segments. As to staffing, staffing has been an ongoing process. Our most recent additions have only started as of a month ago. So, I think judging them to not have produced anything is not a strong enough time horizon. That being said, as I mentioned that we are working on deployments right now. They have not yet been announced and as soon as they can be announced they will be announced. So we have been working on things but as of this stage I am not in a position to yet announce them.

George Gosbee

Anna, we have been hearing this for ten months. It’s almost a recording, what you have said the last couple of conference calls, I mean, we are working on these things. My God, how long does it take to work on them? There is something wrong here, and I don't know what the heck it is. And I can't believe you’ve only been hiring people for BOLT for a month. You announced you were going to be hiring people six months ago?

Anna Chagnon

George, all I will say to you is that hiring people is an ongoing process. We have hired people throughout the last six months, but the people regarding sales have just recently come on board. Second of all, what I mentioned in the conference call was that these deployments are taking longer to deploy than we had anticipated. That doesn't mean they’re not being worked upon, and I do understand your frustration at the lack of announcements. We’re doing everything in our power to get things announced, but it is a joint announcement plan that we have to get agreement. And again, it’s important to the OEM dealer to make sure that we do not announce things prematurely and give up a competitive position for them. So, I do understand your frustration, but I believe I've answered all I can answer for you.

George Gosbee

Well, let me ask you one final question. Do you have some of these things signed that you cannot announce and will announce when you get agreements from the companies?

Anna Chagnon

Yes.

George Gosbee

Okay. Thank you.

Operator

At this time, I am showing no further questions.

Anna Chagnon

Okay. Thank you, everyone. I appreciate that there are no further questions. So, thank you again for your continued support.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may now disconnect. Have a good day.

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