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Executives

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

Analysts

Matthew Spratford - Sidoti & Company, LLC

Ken Lang

Unknown Analyst -

Brandon Butler

J.D. Steinhilber

Bitstream (BITS) Q1 2011 Earnings Call May 13, 2011 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the first quarter earnings release conference call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for today, Mr. Jim Dore. Sir, please go ahead.

James Dore

Hello, and welcome to Bitstream Inc.’s First Quarter 2011 Conference Call. I am Jim Dore, Vice President and Chief Financial Officer of Bitstream. Here with me today is Costas Kitsos, Bitstream's Vice President of Engineering, who is currently focused on our Publishing division.

As previously announced, Anna Chagnon has resigned as our CEO on May 1, and Amos Kaminski, the Chairman of our Board was named Executive Chairman and CEO of Bitstream. Unfortunately, Mr. Kaminski is traveling out of the country on company business related to our acquisition in Israel and will not be able to join us on the call today. For those of you new to Bitstream, Mr. Kaminski has been Chairman of the Board since August 2010. He was also previously Chairman of the Board from 1991 through 1996 and has been a director of the company since 1985. Mr. Kaminski asked me to relay the following message from him, so I'll read that statement.

Good afternoon. I apologize for not being able to join the call today. I will be present at our annual meeting on June 8 and will be happy to address any questions you may have at that time. We thank Anna Chagnon for her leadership and commitment to Bitstream. With her departure, the board has elected me to serve as interim CEO. We have formed a search committee to search for and nominate to the board a new CEO who will grow the company and shareholder value. The executive team also wishes to thank Anna for her leadership at Bitstream.

And so now we will begin the 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 product, 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 first quarter of 2011 with the following financial highlights. Revenue increased by $1.6 million or 31% to $6.8 million for the 3 months ended March 31, 2011, as compared to total revenue of $5,208,000 for the 3 months ended March 31, 2010, and by $294,000 or 5% sequentially as compared to $6,519,000 for the 3 months ended December 31, 2010. Revenue has now grown sequentially for the last 4 quarters.

Q1 revenue was the highest quarterly revenue amount since we went public in 1996, and revenue increased across all of our product lines as compared to the first quarter of 2010. The company's aggregate cash, cash equivalents and investments at March 31, 2011, totaled $11,456,000, an increase of $188,000 from a balance of $11,268,000 at December 31, 2010.

The increase in cost of license revenue for the 3 months ended March 31, 2011, as compared to the 3 months ended March 31, 2010, is due to an increase in direct third-party costs of $473,000, primarily from royalties associated with our e-commerce sales and $47,000 for amortization expense related to the acquisition of iWay technology. Cost of services increased primarily due to additional personnel added with the iWay acquisition.

Operating expenses increased $1,558,000 to $4,496,000 for the 3 months ended March 31, 2011, from $2,938,000 for the 3 months ended March 31, 2010, reflecting our investment in the iWay and BOLT technologies. Our type OEM and e-commerce product lines continue to be strong and generate sales and cash to help fund these investments.

Our GAAP loss from operations increased $602,000 to $1,005,000 for the 3 months ended March 31, 2011, as compared to $403,000 for the 3 months ended March 31, 2010.

Our net loss increased $636,000 to $1,034,000 or $0.10 per share for the 3 months ended March 31, 2011, as compared to $398,000 or $0.04 per share for the 3 months ended March 31, 2010.

Our non-GAAP loss excludes stock-based compensation expense, the amortization of intangible assets, which are primarily acquired from Press-sense Ltd, and acquisition cost of certain assets of Press-sense Ltd. Our non-GAAP loss from operations increased $511,000 to a loss of $680,000 for the 3 months ended March 31, 2011, as compared to $169,000 for the 3 months ended March 31, 2010.

Our non-GAAP net loss increased $545,000 to $709,000 or $0.07 per share for the 3 months ended March 31, 2011, as compared to $164,000 or $0.02 per share for the 3 months ended March 31, 2010. I'll now go into each of our -- our product lines.

I'll begin with our Type OEM. In Q1 2011, we saw a solid revenue performance with new orders from both existing and new customers. The printer market is seeing increased activity with several deals signed during the quarter, including one with a major printer OEM.

New revenue is being generated in the Game Software segment as deal with major game developers and their development studios are being signed. The technology is being licensed on a per title, per platform basis, and sharing the -- any new titles will require new licensing.

Quarterly royalties continue from long-term licenses with customers in the IP telephony market, printer market, set-top box and digital TV market, embedded operating system market, as well as the desktop consumer software market and the small office/home office network products market. The latest update to Bitstream's font technology, Panorama 6.0 and Font Fusion 6.0, was announced in May. This new release offers developers and OEMs an even faster, easier solution to rendering text in any language. The OEM-type group continues to be profitable and is helping us fund our Pageflex and BOLT growth initiatives.

Now I'll go to the e-commerce MyFonts.com business. MyFonts.com continues to grow, recording its highest quarterly revenue since inception during the first quarter of 2011. First quarter, 2011, MyFonts revenue was up 25% year-over-year. MyFonts revenue growth was driven by new user acquisition and the addition of Webfonts. Over 70,000 new users registered in MyFonts during the first quarter.

As we discussed on the last earnings call, MyFonts introduced Webfonts in January of this year as a way to offer customers a streamlined way to purchase and manage fonts for their websites. Webfonts enabled publishers of Webfonts -- of webpages to use any font just like print media. Before Webfonts, web designers were limited to a certain fonts like Times New Roman and Arial.

Growth in this part of the MyFonts business is exceeding all of our expectations. Demand is increasing and customers are spending more per order when buying Webfonts, as compared to fonts for only print media. In order to help customers better understand the potential of Webfonts, how to use them and to show examples of Webfonts in use, we created a website to showcase Webfonts. You can find that at webfonts.myfonts.com, which went live in early April. The examples are actual websites submitted by customers through an interactive tool on the website. We will continue to expand the Webfonts showcase with new examples and information to help customers use Webfonts.

MyFonts continues to offer a much wider variety of fonts than any competitor and adds new fonts at a higher rate than anyone else. MyFonts will capitalize on our success and innovation in selling fonts to print media to build our market share by targeting the new market, the web designers and developers.

Pageflex. For our Pageflex publishing business, we continue to strengthen our OEM relationships, which we acquired with the iWay product in 2010. In February, we released the first major update to the Pageflex iWay product since acquiring it last year. We applied the expertise in engineering stable upgrades that Bitstream is known for, which resulted in a major improvement in product quality.

Reaction from both our OEM partners and customers has been very favorable. Our OEM partners has introduced this new iWay release to their customers. We additionally has signed contracts with iWay resellers in the U.S. and Europe.

In February, Pageflex increased our presence at Dscoop, the annual user conference for HP Indigo Digital Press owners in support of our OEM status with the Indigo division of Hewlett-Packard. Our enhanced marketing effort at this conference resulted in a 160% increase in our leads from the show over the previous year. We also participated in a number of regional HP Indigo events in both Europe and in the U.S. to promote Pageflex products.

In addition to the iWay release, we also released version 2.0 of our Studio ID product, which is a desktop variable data publishing plug-in for the popular Adobe InDesign graphic design application. Notable in this release was the addition of our patented flex technology so that customers can continue working in the InDesign application while enjoying the benefit of having their document layouts dynamically react to the non-variable content that is added when the document is merged with the database.

Also on the product front, we shortly will be releasing version 7.7 of the Pageflex suite of server-based products with significant enhancements that will simplify the effort required for our customers to provide marketing services to their customers.

In terms of our latest Pageflex offering, the Pageflex software, as a service offering that we announced last fall, continue to grow with additional customers in both the U.S. and Europe.

In March, Pinhas Romik, a veteran of the Israeli high-tech industry, was appointed General Manager of the Pageflex division. Mr. Romik brings to the company demonstrated experience, leading successful international businesses in the high-tech industry. As we mentioned on the last call, Mr. Romik will manage the Publishing business internationally and focus on leading its success. He's brought an immediate focus on reinvigorating the Pageflex sales and marketing efforts to drive revenue. We've also hired a business development manager to manage our OEM relationships.

We also are working on a new OEM and reseller deals for the Pageflex product line and anticipate making announcements in the coming months.

Now on to BOLT. Since we launched it publicly, BOLT users have streamed more than 150 million minutes of video and viewed nearly 4.6 million webpages. All regions have shown growth with India, Nigeria, USA, Mexico and Indonesia consistently ranking in the top 5 geographies quarter-over-quarter. We released BOLT 2.5 at the Mobile World Congress trade show in Barcelona. We released an update to the Java version with more speed and enhanced functionality. We will also have a preview version of our BOLT for Android release available soon.

Public usage is now being monetized on a global basis through advertisement deals with BuzzCity and a new partner, which we hope to announce soon. We have selected locations aware mobile search expert xAD as our local search partner. Through this partnership, locally relevant user searches from within BOLT will now be provided with xAD results specific to the user's location, search terms, monetizing mobile searches to our browser.

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 revenue are not yet substantial, we feel it's an important and growing part of our monetization strategy as we work through business deals that will add more partners and 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 are much higher since searches are a user-triggered action. And if relevant results can be delivered, sponsor 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 are prepared to launch BOLT on multiple devices in the Indonesian market. All of Bakrie's Esia phones will feature Bitstream's BOLT mobile browser. This partnership is providing valuable consumer market knowledge and experience, preinstalling BOLT on commercial devices while providing entry into the one of the fastest-growing markets globally.

We announced the deployment of our BOLT SDK, which is a cloud-based service that enables mobile application developers to build feature-rich Java applications that work just as well on entry-level feature phones as they do on high-end smartphones. This SDK was adopted by one of Asia's premier provider of online news, information, communication, entertainment and shopping services as the core technology for mobilizing its next-generation e-mail service.

We are currently involved in discussions with multiple OEMs and carriers to further widen the deployment of BOLT. Current revenue recognition has us booking advertising and search revenue when received, while we are spreading license revenue over 18 months due to certain contractual requirements.

We thank you for your continued interest in Bitstream and look forward to answering any of the questions that you may have. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from the line of Matt Spratford [Sidoti & Company].

Matthew Spratford - Sidoti & Company, LLC

I just have a question. I don't know if you could maybe give us a little bit more of the circumstances surrounding Anna's departure?

James Dore

No. I -- the -- we did do a press release, and we announced it, and we're moving on with the business, and I'm not -- I'm not commenting, I guess, additionally other than what we have already released.

Matthew Spratford - Sidoti & Company, LLC

Okay, no problem, just curious. Second question is, I don't know if you can comment on this one either, but is there, can you give us a little bit more insight into your -- your pricing strategy for OEMs on BOLT?

James Dore

The pricing stand -- strategy for OEMs continue to be per unit. We are still talking cents. We have a wide range of cents based on volume and commitments on the users. It's similar to how we do the pricing in our OEM Type business, where we hope to get a small amount of -- a small amount of access fee, which may be waived in the BOLT instance, and then get continuing royalties. And unfortunately, as those units ship, as I said, we would -- we would actually spread that revenue. So, for instance, well it's a carrier, but Bakrie Telecom, has just started shipping, and we're getting results from them this month. And as we get those results, we'll be spreading that revenue over 18 months.

Operator

Our next question is from the line of Jay Steinhilber [Agile Investments].

J.D. Steinhilber

October, you announced Rothschild as a financial adviser. It's -- we're talking now of 7 full months, we haven't, or pretty close to 7 months, we haven't heard a peep regarding that, at all. And I was just wondering what we -- when are we going to expect to hear something? Are we talking the next 30 days, the next 60 days? Can you give me some ideas of timeframe as far as that goes?

James Dore

I believe, in the next 30 days to 60 days, when Amos, the Chairman, is actually present. He'll be able to comment on that.

J.D. Steinhilber

Okay, so you're speaking of at the annual meeting? There'll be comments or...

James Dore

Yes, he will also be at the annual meeting, and he can answer any of those questions, yes.

J.D. Steinhilber

Okay, he will also be there. Okay, all right.

Operator

Our next question is from the line of Kenneth Lang [RBC Capital Markets].

Ken Lang

At the last conference call, Anna said that there was a plan for returning to profitability. And I noticed that sales keep going up, but income keeps going down. And what I'm wondering is, so far, are you on that plan? Or are things working out as expected? Or have there been problems with that in the last quarter?

James Dore

Okay, so I'll just add -- when we acquired the iWay product in June, we understood at the time that the product needed some work. We did buy it from a bankruptcy court proceeding. And we made the conscious decision and made the plan of that product, I believe we said on the last call too, that we were 18 months out. We have executed the plan, and we are on-track with the plan. In February, when we released the upgrade and update for iWay product, the upgrades were met with -- they were welcomed and accepted as a good step forward. We still need to continue on that 18-month plan to build confidence into the product and see revenue generate of that product. When you're looking at our comparisons to Q1 or Q2, and also in Q2 of this year, as compared to last year, those 2 quarters do not include any of the expenses associated with the iWay product or any of the resources that we are now using for the iWay product. So you will see, year-to-year, you will see a higher expense levels in the first quarter and also in the second quarter. Sorry, that was a kind of a round-about answer, but yes, we still are on track.

Ken Lang

So thing are, things are working out -- things are working out as expected? Is that overall?

James Dore

Yes.

Operator

[Operator Instructions] Our next question is from the line of Brandon Butler [JB Journal].

Brandon Butler

I was wondering if you could talk about -- I saw that, with Ms. Chagnon's departure, there was a reimbursement of $15,000 for reasonable attorney's fees. Can you talk about why that was needed, and if you expect any litigation response to her departure?

James Dore

We do not expect any litigation. We did, we did agree to pay the attorney's fees where she was working out an arrangement with the board. The board, at the time, felt that it was appropriate to agree to pay those, and no, we don't, we don't anticipate any litigation coming out of this.

Brandon Butler

Was it an amicable departure?

James Dore

Yes.

Brandon Butler

And how long do you expect the search to take for a new CEO?

James Dore

I don't believe it will be long, but -- and we have candidates now. But as we say that, they're just beginning the process. It has only been a couple of weeks, so it is going to take a little while. We'll be able to address that more at the annual meeting on June 8.

Operator

[Operator Instructions] Our next question is from the line of George Gubby [ph].

Unknown Analyst -

This question has been asked on the last 2 calls, about your plan of returning this thing to profitability. And whoever it was, was on the phone a few minutes ago, said your sales are going up fairly well, but your losses are increasing. They're not coming down at all, in line with the amount that sales are going up. When do you expect this to change? When is your plan for returning this thing to profitability?

James Dore

Two things to look out when you're looking at our sales number. Our sales number is in Q1 is typically a low OEM month -- I'm sorry, a low OEM quarter, so our increase in sales in the first quarter of the year is typically a large amount of e-commerce revenue, which is lower gross margin revenue. The OEM businesses typically have a -- they're typically strong in the fourth quarter and the second quarter, so that increases our margin in those 2 quarters. So the good news is, that revenue is growing. It's the first time that we've had a Q1 revenue that was greater than the Q4 in a few years. But we also have those expenses for the iWay product line and also the increased investment into BOLT. And we need to see an increase in the OEM revenue, which is highly profitable, in order to see that number drop to the bottom line.

Unknown Analyst -

But what are you looking? Do you have any ideas?

James Dore

Well, the indication that we gave on the last quarter, which was 18 months out, is probably still a good -- as best an estimate as we can give.

Unknown Analyst -

Is that -- you mean, 18 months from now will be when you return from profitability?

James Dore

Well, from last quarter, sorry. That estimate that we gave last quarter is still the best estimate that we can -- have, so it's 18 months out from January.

Unknown Analyst -

So it won't be profitable until the middle of next year, is that what you're saying?

James Dore

Saying that's the best estimate I can give you right now, yes. And that's for the year, George. We may be profitable for a quarter. But if you're looking for a whole year, it's not going to be this year. This is going to be a building year for the products, and it is not going to be a profitable year this year.

Operator

[Operator Instructions] And so I'm showing no other questions. Please continue.

James Dore

Okay, thank you for your interest in Bitstream and continued support. And we look forward to talking to you either at the annual meeting or at our next conference call. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a wonderful day.

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