Bitstream, Inc. (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]

Presentation

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.

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