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Bitstream (NASDAQ:BITS)

Q4 2010 Earnings Call

March 21, 2011 4:30 pm ET

Executives

James Dore - Chief Financial Officer, Principal Accounting Officer and Vice President

Anna Chagnon - Chief Executive Officer, President, Secretary, Treasurer, General Counsel and Director

Analysts

Jack R. Ripsteen

Ken Lang

Operator

Good day, ladies and gentlemen, and welcome to your earnings release call. [Operator Instructions] And now I would like to introduce your host for today, Anna Chagnon. Anna, please go ahead.

Anna Chagnon

Hello, and welcome to Bitstream Inc.’s Fourth Quarter 2010 Conference Call. I am Anna Chagnon, President and Chief Executive Officer of Bitstream.

James 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 listeners not to place undue reliance on such statements.

A short time ago, we reported our results for the fourth quarter of 2010 with the following financial highlights. Revenue increased $940,000 or 17% to $6,519,000 for the three months ended December 31, 2010, as compared to total revenue of $5,579,000 for the three months ended December 31, 2009, and by $537,000 or 9% sequentially as compared to $5,982,000 for the three months ended September 30, 2010. Revenue for the year ended December 31, 2010, increased $1,655,000 or 8% versus 2009. Revenue for the fourth quarter of 2010 was our highest quarterly revenue amount since we went public in 1996, and revenue increased across all of our product lines as compared to the fourth quarter of 2009.

The company's aggregate cash, cash equivalents and investments at December 31, 2010, totaled $11,412,000, a decrease of $1,333,000 from a balance of $12,745,000 at September 30, 2010, and a decrease of $6,753,000 as compared to a balance of $18,165,000 at December 31, 2009, reflecting the use of $6,528,000 of cash in June of 2010 to purchase certain assets of Press-sense Ltd.

Cost of license revenue increased due to direct third-party cost, consisting primarily of royalty expense of $480,000 as compared to the three months ended December 31, 2009. Cost of licenses also increased $47,000 due to the amortization of iWay Technology intangible assets purchased in June of 2010. Cost of services increased due to additional headcount added with the iWay acquisition.

Gross profit increased $287,000 or 9% for the fourth quarter of 2010 versus that of 2009. Operating expenses increased $1,440,000 to $4,476,000 for the three months ended December 31, 2010, as compared to $3,036,000 for the three months ended December 31, 2009. The increase in marketing and selling expense was due to an increase in iWay sales and marketing resources of approximately $232,000 and amortization of iWay-related customer list acquired in June of 2010 of $48,000.

The increase in R&D expense consisted primarily of $567,000 due to the addition of R&D resources related to the iWay product line, as well as increase in hosting cost for the BOLT browser of $78,000. The increase of G&A expense resulted from $263,000 of increases in G&A resources, including the establishment of an office in Israel, increases in directors' fees of $47,000 from an increase in the board and $271,000 in professional services, including investor relations and business advisory services of approximately $20,000 and $145,000, respectively.

Our loss from operations was $880,000 for the three months ended December 31, 2010, versus an operating income for the three months ended December 31, 2009, of $273,000. Our net loss for the three months ended December 31, 2010, was $979,000 or $0.10 per share versus net income for the three months ended December 31, 2009, of $167,000 or $0.02 per fully diluted share.

Our non-GAAP results for the three months ended December 31, 2010, excludes stock-based compensation expense, the amortization of intangible assets primarily acquired from Press-sense Ltd. and acquisition cost of certain assets of Press-sense Ltd. Our non-GAAP loss from operations was $579,000 for the three months ended December 31, 2010, as compared to an operating income for the three months ended December 31, 2009, of $472,000. Our non-GAAP net loss was $678,000 or $0.07 per share for the three months ended December 31, 2010, versus net income for the three months ended December 31, 2009, of $366,000 or $0.04 per fully diluted share.

Anna Chagnon

Our OEM-type business continues to close large OEM deals with customers for our font technologies and fonts in a wide variety of markets. Many of these deals also include future royalties based on shipment volume, so we do expect to see an ongoing benefit from these deals once shipments start in six to 24 months, depending upon product. The business also continues to be our most profitable and is helping us fund our Pageflex and BOLT growth initiatives.

MyFonts continues to grow, recording its highest quarterly and annual revenue since conception during the fourth quarter in 2010. We also recorded our highest growth in new users during 2010, which helps fuel our growth in revenue. We currently have over 1.4 million users of MyFonts, and they have downloaded almost 10 million fonts from the site since inception.

During the first quarter of 2011, we also introduced Webfonts on the MyFonts site. Webfonts enabled publishers of Web pages to use any font just like print media. Before Webfonts, Web designers were limited to certain fonts like Times New Roman and Arial. What took so long, you might ask, for the Web to start working with fonts? The answer is complex. But to cut a long story short, it took that long for font developers, browser developers and Web standards organizations to reach consensus, but finally, Webfonts are a reality. Every website now represents a potential new customer for MyFonts. Since the Web is the preeminent publishing medium, it leads us to believe that font sales to Web publishers will eventually dwarf those to old media publishers.

Webfonts sales are exceeding our expectations in spite of the fact that we are only selling to early adopters at this point. Demand is strong and customers spend 55% more per order when buying Webfonts. So we believe that Webfonts is an extremely important part of the future growth strategy for the site.

Here are some of the advantages enjoyed by MyFonts today. MyFonts offers a much wider variety of Webfonts than any competitor and adds new fonts at a higher rate than anyone else. MyFonts signs up more new font designers than anyone else to offer the newest, freshest fonts for sale on the Web. MyFonts considers fonts to be a fashion business, which helps to sell new fonts to customers who purchased last year's fonts. We believe that the dynamic nature of Web publishing will make it much more fashion conscious in the future, which is great for MyFonts.

Now on to Pageflex. I am pleased to report that our Pageflex publishing business experienced increases in both licensing and services revenue during the fourth quarter. We also started to receive a broader range of OEM revenue from our new iWay product, while we continued progress in building our relationships with our publishing OEM partners. We look forward to growing this business as these partners focus on relaunching the iWay product through their sales channels.

With the acquisition of the iWay product line in June 2010, we made the commitment to invest resources to reinvigorate the acquired business and to solidify key OEM relationships. I'm pleased to report that this process is going as planned, and we are just starting to see the start of some very important growth opportunities for this business, as well through expanded OEM and reseller relationships relating to our complete portfolio of Pageflex products. Currently, we are booking approximately 60% of the Pageflex OEM license revenue when reported, usually a quarter after the sale occurred, and spreading the remaining 40% according to contractual maintenance obligations.

On Friday, we also announced the addition of a General Manager to manage this business internationally and to focus on leading its success. Pinhas Romik, a veteran of the Israeli high-tech industry, will serve in this new role. He has an extensive background of leading successful international businesses over his 40-year career in the high-technology industry, and we welcome him to our management team.

Now on to BOLT. BOLT user growth continues to be strong with installations reaching 20 million globally in March 2011. Since we launched it publicly, BOLT users have streamed more than 130 million minutes of video and viewed nearly 2.3 billion Web pages. All regions have shown growth, with India, Nigeria, USA and Indonesia consistently ranking as the top four geographies quarter-over-quarter.

Public usage is now being monetized on a global basis through advertisement deals with BuzzCity and a new partner. Advertising exposure continues to be gradually increased to establish an optimal rate, balancing revenue generation and usability. The advertisement networks will be gradually expanded through additional partners in order to establish a BOLT-specific ad selection platform for maximum revenue generation. Although advertising revenues are not yet substantial, we feel that this is an important and growing part of our monetization strategy as we work through business deals that will add more partners in more markets.

Mobile search options are currently under evaluation to generate additional revenue streams in specific markets. While the total search count is much smaller than ad-exposed view pages, CPMs [cost per thousand impressions] are much higher since searches is a user-triggered action. And if relevant results can be delivered, sponsored results are perceived as helpful by end users, leading to higher click-through rates.

In addition to public users, BOLT continues to be well positioned within the carrier and OEM segment. We are excited about our first carrier deal, Bakrie Telecom, as they're prepared to launch BOLT on multiple devices in the Indonesian market. This partnership is providing valuable consumer market knowledge and experience, pre-installing BOLT on commercial devices while providing entry into one of the fastest growing markets globally.

We are also seeing interest in licensing our BOLT SDK, which enables carriers, handset manufacturers and other service providers to build feature-rich Web applications that can work just as well on an entry-level feature phone as they do on high-level Smart phones. During the fourth quarter, we also closed a deal that will be announced shortly, licensing the BOLT SDK outside of the carrier and OEM segments. Currently, we are booking advertising and search revenue when received, while we are spreading license revenue over 18 months due to certain contractual requirements. In addition, the special committee of the board of directors continues to be engaged in an ongoing process of working with Rothschild on strategic initiatives to improve 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 I am showing just a couple of questions. Our first is coming from Jack Ripsteen. [JPMorgan Chase & Co]

Jack R. Ripsteen

Can you talk a little bit on the OEM side, were those OEM really ships in font? Or are those in another category?

Anna Chagnon

On what -- which comment? We actually have two OEM businesses now. We have the OEM font business, and we have the OEM business we're now doing through our Pageflex publishing product.

Jack R. Ripsteen

Okay, I guess in the press release, it wasn't clear whether that was OEM font or OEM Pageview or Pageflex.

James Dore

You're talking about the comment where we signed a large deal towards the end of the quarter?

Jack R. Ripsteen

Yes.

James Dore

That's OEM font.

Jack R. Ripsteen

OEM font. And then it said that revenue would be forthcoming or potential. Can you talk a little about who that might be with? Are those printers? Are those handsets? What kind of OEM deals?

Anna Chagnon

They're actually across multiple segments so all of the above. And they are all for devices that we expect to ship, assembled in six months, some within 12 months and some within 24 months. So as many of the shareholders know, we do generally charge an upfront access fee in most cases to OEMs, then we receive the real revenue as devices ship on an ongoing basis. So if those devices are successful, we'd expect to start seeing that revenue come in starting in about six months but spanning over that time frame.

Jack R. Ripsteen

Okay. And was this a takeaway from another customer or additive to other features that are already in these devices?

Anna Chagnon

These were additive deals. So these were deals that we were competing for that we have not done in the past for the most part. Some were renewals as well.

Operator

And we'll take our next question coming from Kenneth Lang. [RBC Capital Markets]

Ken Lang

Yes. I was wondering do you have an overall plan for returning to profitability. And if you do, are you on track? And how is it proceeding?

James Dore

We do have a -- as our normal course of action, a budget and a forecast. And we do have a plan to return to profitability, which we are incorporating the new iWay product line and the expense associated with that product line into the business. And we have a plan for making that business profitable, which includes developing the relationships with the OEM. And yes, those relationships are proceeding and going according to plan so far.

Operator

And at the moment, I'm showing no further questions. Anna, since I'm showing no further questions, I'd like to turn it back to you for any concluding remarks.

Anna Chagnon

I just want to thank all our shareholders for the continuing support. I hope that by this earnings announcement, you see all the positive news that we have. We're very excited about the future, and we appreciate your continued interest in our company and our products. Thank you.

Operator

Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect, and have a great day.

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