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Bitstream (NASDAQ:BITS)

Q2 2011 Earnings Call

August 15, 2011 4:30 pm ET

Executives

Unknown Speaker -

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

Costas Kitsos - Vice President of Engineering

Analysts

Unknown Analyst -

George Guppy

Operator

Good day, ladies and gentlemen, and welcome to the Bitstream 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 today, Jim Dore, Vice President and Chief Financial Officer. Please begin.

James Dore

Hello, and welcome to Bitstream Inc. Second Quarter 2011 Conference Call. I am James Dore, Vice President and Chief Financial Officer, Bitstream. And here with me today are Costas Kitsos, Bitstream's Vice President of Engineering, who is currently focused on our Publishing division; John Collins, Vice President and Chief Technology Officer currently focused on our MyFonts.com e-commerce business; and Sampo Kaasila, Vice President of Research and Development, who is focused on our browsing and OEM-type product lines.

Amos Kaminski, our Executive Chairman and CEO, has asked me to read the following statements.

Good afternoon. I apologize for not being able join the call today. As a results of ongoing exploration of strategic alternatives, the company continues to actively pursue a sale of the business in full or in part. No definitive agreements or understandings have been reached and there can be no assurance that any such transaction will be consummated. Also, regarding our search for a new CEO, several potential candidates have been identified, for the selection process is a part of the company's broad strategic review. As such, nothing further can be said at this time. We will begin this conference call with highlights from 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 second quarter of 2011 with the following financial highlights. Revenue increased by $1,884,000 or 35% to $7,319,000 for the 3 months ended June 30, 2011, as compared to total revenue of $5,435,000 for the 3 months ended June 30, 2010 and increased $506,000 or 7% sequentially as compared to $6,813,000 for the 3 months ended March 31, 2011. Revenue has now grown sequentially for the last 5 quarters.

2Q revenue was the highest quarterly revenue amount, and revenue increased across all of our product lines as compared to the second quarter of 2010. The company's cash, cash equivalents and investments at June 30, 2011, totaled $10,402,000, a decrease of $1,054,000 from the balance of $11,456,000 at March 31, 2011. The decrease reflects the payments of approximately $650,000 related to the resignation of our former CEO.

Increase in cost of license revenue for the 3 months ended June 30, 2011, as compared to the 3 months ended June 30, 2010, is due to increase in direct third-party costs of $774,000, which is primarily comprised of royalties from the sale of third party products of $499,000 as well as $244,000 in closing fees for the browsing product line. Prior to the monetization of the browser user base, hosting fees had been classified as a research and development expense, which was its primary function at that time. Cost of services increased primarily due to the additional personnel added with the iWay acquisition.

Operating expenses increased $1,607,000 to $5,177,000 for the 3 months ended June 30, 2011, from $3,570,000 for the 3 months ended June 30, 2010. Marketing and selling expenses increased $132,000 primarily due to additional costs, including personnel associated with the acquisition of the iWay product line. Research and development expenses increased $449,000, primarily due to increases in personnel and benefit costs of $551,000. G&A expense increased $1,026,000, including $695,000 associated with the resignation of our former CEO, $150,000 in professional services relating to the company's exploration of its strategic alternatives, and $278,000 related to the establishment of an office in Israel in June 2010. These increases were partially offset by decrease in stock compensation expense of $152,000 from the forfeiture of stock options held by the former CEO.

GAAP loss. Our loss from operations increased $640,000 to $1,354,000 for the 3 months ended June 30, 2011, as compared to $714,000 for the 3 months ended June 30, 2010. Our net loss increased $566,000 to $1,251,000 or $0.12 per share for the 3 months ended June 30, 2011, as compared to $685,000 or $0.07 per share for the 3 months ended June 30, 2010.

Non-GAAP loss. Our non-GAAP results exclude stock-based compensation expense, the amortization of intangible assets primarily acquired from Press-Sense Ltd., acquisition cost of those assets from Press-Sense Ltd. and the cost of the resignation agreement with our former CEO. Our non-GAAP loss from operations increased $329,000 to $423,000 for the 3 months ended June 30, 2011, as compared to $94,000 for the 3 months ended June 30, 2010. Our non-GAAP net loss increased $255,000 to $320,000 or $0.03 per share for the 3 months ended June 30, 2011, as compared to $65,000 or $0.01 per share for the 3 months ended June 30, 2010.

Now to update you on our activities by product line. In the second quarter, our Type OEM product line reported solid revenue performance with license revenue increasing for both fonts and font rendering technology sequentially over the last quarter. Revenues being generated from the digital TV set-top box and broadcast industries, as well as from printer OEMs, consumer electronics manufacturers, game software developers and handheld device application developers. We continue to receive quarterly royalties from long-term licenses with customers, and several major customers renewed licenses during the quarter. Additionally, our custom-type group saw a substantial increase in the amount of custom-type development work for the quarter for both existing and new customers.

On the development front, we recently released our Bitstream Panorama SDK solution for Android, the line layout of complex languages, which includes a library of Panorama to be used on Android at the application level. This library allows any application to load fonts at the application level and render any complex script. Currently, Google does not offer comprehensive line layout support for complex languages such as Indic, Arabic or Thai, and this solution presents an opportunity for us to license Panorama to developers who want to offer Android-based applications with complex language support.

We also continue to expand our OEM fonts offering by signing OEM licensing agreements with new foundries. Our OEM type and MyFonts e-commerce product lines continue to be profitable and are helping us to fund our Pageflex and BOLT growth initiatives.

MyFonts.com. In the second quarter, our MyFonts e-commerce product line recorded its highest quarterly revenue since inception, with revenue up 39% year-over-year. MyFonts revenue growth was driven by new user acquisition as well as the addition of Webfonts with Webfonts exceeding our expectations since launched in January of this year. Webfonts enable publishers of web pages to use any font just like print media. Before Webfonts became generally available, web designers were limited to Times New Roman, Arial, as well as other fonts. As every website now represents a potential new customer and since the Web has become the preeminent publishing medium, we continue to believe that font sales to web publishers will eventually dwarf those of the old media publishers.

Here are some of the advantages enjoyed by MyFonts. MyFonts currently offers 40,000 Webfonts, far more than any competitor. MyFonts signs up more new font designers than other web font vendors, who can offer the newest, freshest fonts for sale on the Web. MyFonts considers fonts to be a fashion business, which help us sell new fonts to customer who previously purchased last year's fonts. We believe that the fashion-conscious nature of web publishing will disproportionately benefit MyFonts' Webfonts offerings. MyFonts offers paid-up licenses for all Webfonts. We believe that website designers will overwhelmingly prefer such licenses over subscription to recommend to their clients.

Now turning to our Pageflex publishing business. We've increased efforts to educate the product knowledge of the OEM presales engineered for iWay, our OEM business for Pageflex. These people play a major influential role in the sales process at our OEM partner company. Though primary focus has been on deepening their knowledge of the iWay product, they are also educating them about our full Pageflex product line, resulting in increased sales opportunities for our Pageflex Storefront and software as a service product as well. As the new Vice President of Sales and Marketing for Pageflex, Elly Perets is tasked with growing the sales pipeline for Pageflex, increasing revenue, expanding the reach of Pageflex products into new regions and new markets and managing the OEM relationships. Mr. Perets has extensive experience in the print and graphic arts industry, having served as Vice President of Sales and Marketing at Press-sense for 7 years prior to that company's financial difficulties, which eventually led to Pageflex acquiring the iWay asset.

He spent the past 3 years as a consultant on the theory of constraints in the area of manufacturing and distribution for large enterprises in China. He will be making several important announcements for Pageflex next month at Graph Expo, which is a major print industry event in North America this year. We expect to announce a major new OEM partnership, significant enhancement to our product line and a new offering from Pageflex.

On the development front, in June, we released version 7.7 of the suite that includes Pageflex Storefront, Pageflex Campaign Manager and Pageflex Server. This release added the ability for customers to include cross-media campaigns created with Pageflex Campaign Manager with any Pageflex Storefront marketing document management site. This new capability enables Pageflex customers to expand their businesses into new self-service markets and broaden the range of services marketing service providers can offer their clients, so that they can open up new lines of business and build stronger business relationships.

Finally, our BOLT browsing business. On the OEM interior front, BOLT is gaining a lot of traction in the Southeast Asia region. It just signed a contract with a leading chipset vendor to preload BOLT as part of their chipset platform. During the third quarter, we will continue to drive momentum in this region and increase our outreach to carriers, OEMs, IP vendors and content providers, which we hope expand our user base, brand recognition and generate revenue in markets such as India and Indonesia. Current revenue recognition has us booking advertising and search revenue when received, while we're spreading license revenue over 18 months due to certain contractual requirements.

Our BOLT growth strategy includes the monetization of our user base, and to that end, the increase of our user base and positive organic usage growth. During the second quarter, BOLT exhibited yet another strong quarter with usage now touching 400 million page views per month.

We released the Android version of the BOLT browser for a preview to leading bloggers and consumers with more than 5,300 end-users downloading the Android browser, and the feedback is generally positive as seen on social media networks like Twitter and Facebook.

During the quarter, we also launched the Indic version of BOLT for our free end-user base. We've taken it very strong on that front also. Indic version supports 9 major languages spoke in India.

Those new versions address important consumer markets, the public monetization strategy and are expected to help continue the positive organic usage growth. The Android version will become a cornerstone of the public monetization strategy as high-end smartphone users generally browse more than Android natively ports location information as a basis for higher monetization. Indic version is expected to unlock a large number of users in the South Asian market, generally limited to higher educated English-speaking consumers.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first questioner comes from Ace Stenberg [ph] with Morgan Stanley.

Unknown Analyst -

I have to ask regarding the BOLT. Can you provide us with some numbers as to the revenue the last couple of quarters and this quarter directly related to the BOLT? And do we see that accelerating as far as the revenue? And is there any news of any upcoming deals? You mentioned something about the chipset deal in Southeast Asia, yet I don't see any note out on the Dow Newswire or anything of that nature.

James Dore

This is Jim. I'll address the revenue portion of that. We haven't done a -- we haven't had a press release yet, so we're not able to speak to who that license arrangement is with. As far as the BOLT, revenue, BOLT revenue's still a small part of our revenue. It has been growing and to say it's a high percentage, is easy because it's starting basically at a very, very low amount. The monetization of that user base is where we see the short-term growth of that as far as advertising and search revenues. The longer-term growth on that will be both from the advertising and as well as from the units. But at this time, we're not yet disclosing the specific numbers, but it is a relatively small number compared to the rest of our business.

Unknown Analyst -

Just another question, totally different topic. A year ago, you mentioned about the investment banker looking to come in and unlock value possibly. We're approaching a year now. Can you give us some ideas when are we going to see some finality one way or the other? I've never seen anything in my 20-some years of investing taking this long, and I'm sure your shareholder base is looking for some finality to whatever is going to happen, if anything. Can you -- is it reasonable to think that by the end of the year we're going to know which direction this company is going to be going one way or the other?

James Dore

I think that's reasonable, but it's also been longer for us as well than we anticipated. We're a complicated small company with 4 different distinct product lines. So we are a complicated story, and I believe that -- I don't know when an announcement will be, but we'll tell you as soon as we can.

Operator

Our next question comes from George Guppy with Western International.

George Guppy

You got -- you had both Rothschild and also Columbia Pacific said they were evaluating the possibility of doing something with this company, and neither one of these companies has done anything with it, which makes me wonder is there anything here really, honestly, to do something with? But above that, you're in a state of flex, which was just brought up by this other gentleman, that you don't know if you're going to sell the company or part of the company or you're going to continue with the company. How can you possibly hire anybody that's any good that comes in under those kinds of circumstances?

James Dore

George, this is Jim. So we're looking at the whole strategic alternative value, and you're correct. The combination of strategic alternatives is going to have an effect on what do we do for the CEO search, and that all has to be looked at together and we have talked with -- well, I haven't, the search committee has talked with people and identified candidates, and the process is ongoing. And they're -- at the time, there's nothing else that we can say. We would say if nothing was happening, we'd say that there was conclusion outlook. But right now, there's nothing to say whether there is something happening or there's not. I'm not trying to be evasive, but without having an announcement that I can publicly point to, there's not really much else I can say with that.

George Guppy

Do you have any idea on when you might be able to have a public announcement to that effect?

James Dore

No, I don't at this time.

Operator

Our next question comes from Kenneth Lang [ph], private investor.

Unknown Speaker

Yes, in past conferences, it has been stated that you had a plan to return to profitability and that you were on track in that plan. I have 2 kind of related questions. Was this reflected in the last quarter? And are you still on track towards profitability?

James Dore

We are. The last quarter, you'll see that we lost a significant amount. But if you back out the $700,000, approximately, with the CEO, the loss would have been a significant less -- significantly less than the Q1 loss that we had. So we are -- we are still executing the plan that we have, and I believe on the last call, I did say that profitability isn't going to be in 2011. 2011 and the beginning of 2012 are, I said that on the last call, is going to be really a growth and an increase year for us in investing and getting the business going. But we are -- the plan is being executed and we still are working according to plan.

Operator

Our next question comes from Glen Mattson [ph], from -- shareholder.

Unknown Speaker

Yes, I'm a little confused. You're investing heavily in iWay apparently, and yet you're talking about selling the company. Can you explain the iWay transaction? And also, on your balance sheet, you list long-term investments of $6 million. What are those investments, please?

James Dore

This is Jim. The investments are government and corporate bonds, and that was one of your questions.

Unknown Speaker

The other one is relating to iWay.

James Dore

iWay. The acquisition of iWay was a strategic acquisition for our publishing business, getting the OEM -- do you want to speak more to that? Getting into the OEM business with a publishing market was something that we had tried to do unsuccessfully in prior years. We think that's where the growth is in the publishing market that will help us in the future. Also, that was a company that we had talked with prior to buying that product out of bankruptcy at a significantly higher valuation. So we think that we -- at the time and still today, that was a -- we got the good product for a good price. We think that it adds value to the publishing business and it will increase publishing business going forward in years to come. As far as we are trying to sell that business, I don't know if that's -- what we are doing is looking at strategic alternatives to make sure that we provide the best value and the best use of those resources that we have acquired for our investors. Now whether that best use is for Bitstream to keep those existing businesses as they are going or alternatively to do something else with them. And we're just open to providing the best use of those resources.

Unknown Speaker

If you bought a company which was in bankruptcy with a mature product line, why have your costs gone up so much because of that acquisition?

James Dore

The cost -- the acquisition, the product line, it was a mature product line with a lot of bugs when they went to a new platform. So Press-sense had developed the iWay product successfully and had decided to do a bunch of functional improvements, platform improvements and some design engineering on it all at the same time, and what happened was that it didn't work as well and the OEM strategy -- the OEM customers lost faith in the product. After that, Press-sense had built up a huge team and were spending a lot of money on developing that product to get those -- to get that area fixed. We acquired a portion, just the iWay product, not the whole business from the court because we felt and we still feel that product adds to our value and that we continue with that team. That said, we had investment in that team, which we said at the time of the acquisition that we were going to have to improve the product and we were going to have to invest resources and money into developing that product to get it to a stable state where the OEMs feel comfortable selling that product. In December, I think somewhere around December, we had a major upgrade to that product line, which added the needed stability. We still have more functions and more features to add to it, but getting the stability and getting the OEMs to accept the product and be willing to sell the product, or to continue it, one of the OEMs have actually stopped selling the -- 2 of the OEMs have actually stopped selling the product. They've since started up again and are reacting positively to the upgrades that we've done. So that was the indication when we had purchased the asset that it was going to take 18 months at that time. As I've said at beginning of the year, 18 months to get that product, but it was actually generating the revenues to justify the expense that we've put into it. Sorry for the long answer.

Unknown Speaker

How is it -- how are you progressing on that process?

James Dore

Well, the key thing was getting the upgrades and updates, which we've done out in December. We have another one...

Costas Kitsos

We have another one coming out in September, but significant enhancements -- this is Costas Kitsos speaking -- but for especially the enterprise market, the larger markets that the OEMs are going after.

Unknown Speaker

But from what you're saying, I guess we can expect to see large revenue increases from that product line.

James Dore

Yes, you can expect to see large revenue increases. They -- realistically, we have 2 big shows coming up. We have a show in September, which we'll make a couple of announcements. That's the Graph Expo show. And the other big publishing industry show is next May, which is DRUPA in Europe. So the OEM pushes for their product lines where they'll actually expect to see -- where we'll actually expect to see some increases will be some -- a little bump-up after Graph Expo and then a large bump-up after DRUPA.

Unknown Speaker

Okay, good. And I'm seeing some improvement in operations because if you factor out, as you said, the previous CEO's salary and termination fees and the increases in revenues are being accounted for under the rules of accounting for revenue over an 18-month period, I see some improvement in revenue and reduced costs as well. Is that the way to look at it?

James Dore

Yes, and if you look on the balance sheet, you'll see the deferred revenue, deferred revenue line increasing also, so we have revenue that we're building up from those deferrals.

Operator

[Operator Instructions] I do have a follow-up from George Guppy.

Unknown Speaker

We haven't heard how many new -- how many total users you have now in that BOLT. And I know the last I heard was about 25 million users. You mentioned something about pages being viewed, but not the number of users, I'd assume. And also...

James Dore

The way that we're monetizing it now, and what we've switched to is to talk about page views because page views are exactly how we're going to be compensated with on the advertising and search engine revenue. They don't look at the number of users you have. The companies that we're talking to look at the number of page views that you have, and every page view is a potential for revenue source. So we've switched to the page views over the user counts.

Unknown Speaker

Now you've had these people on board, these advertising people on board now for what, last part of the year, I guess. I mean, it took so long getting this base built up. You've got this people on board. Why is it so slow now getting revenues from this thing? I mean, we've -- I've waited for 5 years hearing about ThunderHawk and then BOLT and about how everything's going to be great, and it's always slow, Jim. Why is it so slow?

James Dore

As far as a year, our first search advertising revenue that we -- we did announce deals with our unit-based OEMs and carrier prior to that, but our first really monetization of our free user base didn't start until April. So it still is a while, but it hasn't been a year. It's been really the one quarter so far. And we have seen an increase. We'll try to be -- as our business matures or grows, we'll try to be more forthright on exactly what's happening with the business. But right now, as I said, it is a very small part of the business. But the search revenue and the advertising revenue didn't actually begin receiving any until April. We're also on a month lag -- a quarter lag on those. So when they -- there's a quarter -- we book it when we receive it, which is a quarter behind when the actual searching or advertising was actually done.

Unknown Speaker

How is you feeling about this? I mean do you expect this to really be a major part of your revenues in this company down the road? And how long do you think that might take?

James Dore

We do expect it to be a major part of the revenue. We called it our baby product. We had the 3 higher-value products as far are contributing to the operating line. And we expect that BOLT will go alongside those other 3 businesses.

Unknown Speaker

You don't have a timeframe as far as when you think this will really take off?

James Dore

No, I don't. It really depends on more announcements and some more agreements that we can come up with, and that we hope to announce.

Operator

I'm not showing any other questions. I'd like to turn it back over to Mr. Dore for closing comments.

James Dore

I'd like to thank everybody for their support, continued support, and hope to see you on the next call. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.

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