Monotype Imaging (TYPE) Announces Third Quarter 2010 Results

Nov. 2, 2010 (Business Wire) — Monotype Imaging Holdings Inc. (Nasdaq: TYPE), a leading global provider of text imaging solutions, today announced financial results for the third quarter ended Sept. 30, 2010.

Third quarter 2010 highlights:

• Third quarter revenue was $28.4 million, a 23 percent increase year-over-year.
• Operating income for the third quarter was $9.7 million, a 49 percent increase over the prior year.
• Non-GAAP net adjusted EBITDA for the third quarter was $13.4 million, or 47 percent of revenue.
• Cash flow from operations for the nine months ended Sept. 30, 2010 was $35.7 million, a 60 percent increase over the prior year period.

“Monotype Imaging had a very strong quarter resulting in double digit year-over-year growth in revenue, operating income, net Adjusted EBITDA and earnings per share,” said Doug Shaw, president and chief executive officer. “We achieved record OEM revenue and our best Creative Professional quarter in nearly two years.”

Scott Landers, senior vice president and chief financial officer, said, “The fundamentals of our business continue to strengthen, and we once again drove significant levels of profitability and operating cash flow. For the full year 2010, we expect to return to double digit revenue growth.”

Third quarter 2010 operating results

Revenue for the third quarter of 2010 was $28.4 million, up 23 percent compared to $23.0 million in the third quarter of 2009. OEM revenue for the quarter was $21.5 million, increasing 32 percent year-over-year. Creative Professional revenue for the quarter was $6.9 million, increasing three percent from the third quarter of 2009.

Net income for the third quarter of 2010 was $5.9 million, compared to $3.0 million in the prior year period. Earnings per diluted share for the third quarter of 2010 were $0.16, compared to $0.08 for the third quarter of 2009.

In the third quarter of 2010, non-GAAP net adjusted EBITDA was $13.4 million or 47 percent of revenue, compared to $10.2 million or 44 percent of revenue in the third quarter of the prior year.

A reconciliation of GAAP operating income to non-GAAP net adjusted EBITDA for the three and nine months ended Sept. 30, 2010 and 2009 is provided in the financial tables that accompany this release.

Cash, cash flow and debt balances

Monotype Imaging had cash and cash equivalents of $54.6 million as of Sept. 30, 2010, an increase from $44.7 million at the end of the prior quarter and an increase from $34.6 million as of Dec. 31, 2009. During the third quarter of 2010, Monotype Imaging generated $13.8 million in cash flow from operations and $35.7 million year-to-date. The company’s outstanding debt was $78.5 million as of Sept. 30, 2010, a decrease from $81.2 million at the end of the prior quarter and a decrease from $91.4 million on Dec. 31, 2009.

Financial outlook

For the fourth quarter of 2010, Monotype Imaging expects revenue in the range of $27.5 million to $29.0 million. The company anticipates fourth quarter 2010 non-GAAP net adjusted EBITDA in the range of $12.5 million to $13.5 million and earnings per share in the range of $0.12 to $0.14.

For the full year 2010, Monotype Imaging expects revenue in the range of $104.8 million to $106.3 million. The company expects full year 2010 non-GAAP net adjusted EBITDA in the range of $46.5 million to $47.5 million and earnings per share in the range of $0.46 to $0.48.

Conference call details

Monotype Imaging will host a conference call on Nov. 2, 2010 at 8:30 a.m. EDT to discuss the company’s third quarter 2010 results and business outlook. Individuals who are interested in listening to the audio webcast should log on to the “Investor Relations” portion of the “About Us” section of Monotype Imaging’s website at www.monotypeimaging.com. The live call can be accessed by dialing (866) 225-8754 (domestic) or (480) 629-9723 (international) using passcode 4372273. The audio webcast will also be archived on the company’s website.

Non-GAAP financial measures

This press release contains non-GAAP financial measures under the rules of the U.S. Securities and Exchange Commission. This non-GAAP information supplements and is not intended to represent a measure of performance in accordance with disclosures required by generally accepted accounting principles. Non-GAAP financial measures are used internally to manage the business, such as in establishing an annual operating budget and in reporting to lenders. Non-GAAP financial measures are used by Monotype Imaging management in its operating and financial decision-making because management believes these measures reflect ongoing business in a manner that allows meaningful period-to-period comparisons. Accordingly, Monotype Imaging believes it is useful for investors and others to review both GAAP and non-GAAP measures in order to (a) understand and evaluate current operating performance and future prospects in the same manner as management does and (b) compare in a consistent manner the company’s current financial results with past financial results. The primary limitations associated with the use of non-GAAP financial measures are that these measures may not be directly comparable to the amounts reported by other companies and they do not include all items of income and expense that affect operations. Monotype Imaging management compensates for these limitations by considering the company’s financial results and outlook as determined in accordance with GAAP and by providing a detailed reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures in the tables attached to this press release.

Forward-looking statements

This press release may contain forward-looking statements including those related to future revenues and operating results, the growth of the company’s OEM business and Creative Professional business, the execution of the company’s growth strategy and anticipated business momentum that involve risks and uncertainties that could cause the company’s actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to: risks associated with changes in the economic climate, including decreased demand for fonts or products that incorporate the company’s text imaging solutions or an overestimation or underestimation by the company of anticipated royalties from unit shipments by our OEM customers; risks associated with changes in the financial markets, including the availability of credit; risks associated with increased competition, which may result in the company losing customers or force it to reduce prices; risks associated with the development and market acceptance of new products or product features; risks associated with the company’s ability to adapt its products to new markets and to anticipate and quickly respond to evolving technologies and customer requirements; risks associated with the company’s adoption of new business and licensing models, including lower than anticipated revenue associated with the company’s Web font services offering; and risks associated with the ownership and enforcement of the company’s intellectual property. Additional disclosure regarding these and other risks faced by the company is available in the company’s public filings with the Securities and Exchange Commission, including the risk factors included in the company’s Annual Report on Form 10-K for the year ended Dec. 31, 2009 and subsequent filings. The forward-looking financial information set forth in this press release reflects estimates based on information available at this time. These amounts could differ from actual reported amounts stated in the company’s Quarterly Report on Form 10-Q for the quarter ended Sept. 30, 2010. While Monotype Imaging may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so, even if an estimate changes.

About Monotype Imaging

Monotype Imaging combines technology with design to help the world communicate. Based in Woburn, Mass. with offices in the U.S., Europe and Asia, Monotype Imaging brings text imaging and graphical user interface capabilities to consumer electronics devices such as laser printers, copiers, mobile phones, digital televisions, set-top boxes, navigation devices, digital cameras, e-book readers and consumer appliances. The company also provides printer drivers and color imaging solutions to printer manufacturers and OEMs (original equipment manufacturers). Monotype Imaging technologies are combined with access to more than 13,000 typefaces from the Monotype^®, Linotype^® and ITC^® typeface libraries – home to some of the world’s most widely used designs, including the Times New Roman^®, Helvetica^® and ITC Franklin Gothic^™ typefaces. Fonts are licensed to creative, business and Web professionals through e-commerce portals, direct and indirect sales and custom design services. Monotype Imaging offers industry-standard font solutions that support all of the world’s major languages. Information about Monotype Imaging can be found at www.monotypeimaging.com.

Monotype is a trademark of Monotype Imaging Inc. registered in the U.S. Patent and Trademark Office and may be registered in certain jurisdictions. Times New Roman is a trademark of The Monotype Corp. registered in the U.S. Patent and Trademark Office and may be registered in certain jurisdictions. Linotype is a trademark of Linotype GmbH registered in the U.S. Patent and Trademark Office and may be registered in certain jurisdictions. Helvetica is a trademark of Linotype Corp. registered in the U.S. Patent and Trademark Office and may be registered in certain jurisdictions in the name of Linotype Corp. or its licensee Linotype GmbH. ITC is a trademark of International Typeface Corp. registered in the U.S. Patent and Trademark Office and may be registered in certain jurisdictions. ITC Franklin Gothic is a trademark of International Typeface Corp. and may be registered in certain jurisdictions. All other trademarks are the property of their respective owners. © 2010 Monotype Imaging Holdings Inc. All rights reserved.

MONOTYPE IMAGING HOLDINGS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited and in thousands)
		September 30, 2010				December 31, 2009
Assets
Current assets:
Cash and cash equivalents		$	54,621			$	34,616
Accounts receivable, net			4,036				5,145
Income tax refunds receivable			—				885
Deferred income taxes			1,013				878
Prepaid expense and other current assets			2,437				1,666
Total current assets			62,107				43,190
Property and equipment, net			1,595				1,790
Goodwill			138,485				140,745
Intangible assets, net			78,214				85,088
Other assets			5,586				1,564
Total assets		$	285,987			$	272,377
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	305			$	395
Accrued expenses and other current liabilities			10,293				8,635
Accrued income taxes			1,704				903
Deferred revenue			12,477				6,446
Current portion of long-term debt			19,250				16,293
Total current liabilities			44,029				32,672
Long-term debt, less current portion			59,279				75,060
Other long-term liabilities			852				784
Deferred income taxes			19,878				18,310
Reserve for income taxes, net of current portion			1,118				1,550
Accrued pension benefits			3,499				3,479
Stockholders’ equity:
Common stock			35				35
Additional paid-in capital			153,719				148,273
Treasury stock, at cost			(86	)			(86	)
Retained earnings (accumulated deficit)			2,186				(10,043	)
Accumulated other comprehensive income			1,478				2,343
Total stockholders’ equity			157,332				140,522
Total liabilities and stockholders’ equity		$	285,987			$	272,377

MONOTYPE IMAGING HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited and in thousands, except share and per share data)
				Three Months Ended September 30,								Nine Months Ended September 30,
				2010				2009				2010				2009
Revenue				$	28,358			$	23,032			$ 77,254				$	68,889
Costs and expenses:
Cost of revenue					1,825				1,788			5,553					4,991
Cost of revenue—amortization of acquired technology					869				847			2,608					2,535
Total cost of revenue					2,694				2,635			8,161					7,526
Gross profit					25,664				20,397			69,093					61,363
Operating expenses:
Marketing and selling					6,731				5,795			18,909					17,287
Research and development					3,934				3,350			11,525					10,184
General and administrative					4,104				3,565			12,200					10,797
Amortization of other intangible assets					1,189				1,190			3,577					3,547
Total operating expenses					15,958				13,900			46,211					41,815
Income from operations					9,706				6,497			22,882					19,548
Other (income) expense:
Interest expense					1,084				1,009			3,387					3,243
Interest income					—				—			(13		)			(60	)
(Gain) loss on foreign exchange					(1,202	)			(688	)		1,487					(693	)
Loss (gain) on derivatives					1,597				1,073			(168		)			1,777
Other expense, net					—				21			(9		)			7
Total other expense					1,479				1,415			4,684					4,274
Income before provision for income taxes					8,227				5,082			18,198					15,274
Provision for income taxes					2,304				2,063			5,969					5,894
Net income				$	5,923			$	3,019			$ 12,229				$	9,380
Net income available to common shareholders – basic & diluted				$	5,886			$	3,001			$ 12,152				$	9,315
Net income per common share:
Basic				$	0.17			$	0.09			$ 0.35				$	0.27
Diluted				$	0.16			$	0.08			$ 0.34				$	0.26
Weighted average number of shares:
Basic					35,208,237				34,403,363			34,710,406					34,330,162
Diluted					36,264,638				35,430,772			35,910,668					35,185,514

	MONOTYPE IMAGING HOLDINGS INC. OTHER INFORMATION (Unaudited and in thousands)
	RECONCILIATION OF GAAP NET INCOME TO NON-GAAP ADJUSTED EBITDA
			Three Months Ended September 30,							Nine Months Ended September 30,
			2010				2009			2010			2009
	GAAP net income		$	5,923			$	3,019		$	12,229		$	9,380
	Provision for income taxes			2,304				2,063			5,969			5,894
	Interest expense, net			1,084				1,009			3,374			3,183
	Depreciation and amortization			2,318				2,340			6,966			6,949
	EBITDA		$	11,629			$	8,431		$	28,538		$	25,406
	Share based compensation			1,395				1,381			4,206			3,904
	Non-cash add backs			248				N/A			800			N/A
	Restructuring, issuance and cash non-operating costs(2)			(2	)			N/A			345			N/A
	Acquisition expenses			—				N/A			—			N/A
	Non-GAAP adjusted EBITDA(1)		$	13,270			$	9,812		$	33,889		$	29,310
(1)	The definition of Adjusted EBITDA was modified on October 30, 2009. As a result, certain add backs to Adjusted EBITDA are not applicable in three and nine months ended September 30, 2009.
(2)	Permits an add-back of up to $250 thousand of cash non-operating expense, which is not to exceed a maximum of $1.5 million when combined together with restructuring and issuance costs, on a trailing twelve month basis.

RECONCILIATION OF GAAP OPERATING INCOME TO NON-GAAP NET ADJUSTED EBITDA
		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
GAAP operating income		$	9,706		$	6,497		$	22,882		$	19,548
Depreciation and amortization			2,318			2,340			6,966			6,949
Share based compensation			1,395			1,381			4,206			3,904
Non-GAAP net adjusted EBITDA		$	13,419		$	10,218		$	34,054		$	30,401

OTHER INFORMATION

Share based compensation is comprised of the following:

		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
Marketing and selling		$	526		$	466		$	1,549		$	1,348
Research and development			277			354			892			908
General and administrative			592			561			1,765			1,648
Total share based compensation		$	1,395		$	1,381		$	4,206		$	3,904

MONOTYPE IMAGING HOLDINGS INC. MARKET INFORMATION (Unaudited and in thousands)
The following table presents revenue for our two major markets:
		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
OEM		$	21,480		$	16,329		$	57,488		$	50,506
Creative professional			6,878			6,703			19,766			18,383
Total		$	28,358		$	23,032		$	77,254		$	68,889

OTHER INFORMATION (Unaudited and in thousands)
RECONCILIATION OF FORECASTED GAAP OPERATING INCOME TO FORECASTED NON-GAAP NET ADJUSTED EBITDA
		Low End of Guidance			High End of Guidance
		Q4 2010			Q4 2010
GAAP operating income		$	8,800		$	9,800
Depreciation and amortization			2,400			2,400
Share based compensation			1,300			1,300
Non-GAAP net adjusted EBITDA		$	12,500		$	13,500
		Low End of Guidance			High End of Guidance
		2010			2010
GAAP operating income		$	31,500		$	32,500
Depreciation and amortization			9,500			9,500
Share based compensation			5,500			5,500
Non-GAAP net adjusted EBITDA		$	46,500		$	47,500

ICR

Staci Mortenson, 781-970-6120

ir@monotypeimaging.com