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Bitstream Inc. (NASDAQ:BITS)
NYSSA IRC Team D
Feb 5, 2010
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AgendaExecutive Summary
Company Overview
Investment ThesisValuation Methodology
Q&A
BitstreamCLEAR Fonts, BLURRY Future.
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Recommendation: SELL12-month price target: $5.18 (-40%)
1) Core business erosion over next 3-5 years
2) New Mobile Browsing Venture is likely to disappoint
3) Sky high multiples are headed for a fall
Blurry
BitstreamCLEAR Fonts, BLURRY Future.
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Agenda
Executive Summary
Company Overview
Investment ThesisValuation Methodology
Q&A
BitstreamCLEAR Fonts, BLURRY Future.
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BITS AND PIECES
BitstreamCLEAR Fonts, BLURRY Future.Source: Company Documents and Student Analysis.
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AgendaExecutive Summary
Company Overview
Investment ThesisValuation Methodology
Q&A
BitstreamCLEAR Fonts, BLURRY Future.
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Investment Thesis
I. Core businesses losing market share
Products lack competitiveness
Customers moving toward proprietary
products
Absence of pricing power
BitstreamCLEAR Fonts, BLURRY Future.
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Investment Thesis Continues
II. Mobile browser likely to disappoint
Late entrant into an over-crowded market
Small and inactive user base
On the losing end of a
technology arms race
42 M450
3 M 27
Opera BITS
Page Per MonthNumber of Download
BitstreamCLEAR Fonts, BLURRY Future.
Source: Company Documents and Student Analysis.
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Projected Revenue Mix
0%
10%
20%
30%
40%
50%
FY 09E FY 10E FY 11E FY 12E FY 13E FY 14E
FONT TECH FONTS PUBLISHING TECH MOBILE TECH
BitstreamCLEAR Fonts, BLURRY Future.
Investment Thesis
Source: Company Documents and Student Analysis.
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-150%
-100%
-50%
0%
50%
100%
FY 09E FY 10E FY 11E FY 12E FY 13E FY 14E
FONT TECH FONTS PUBLISHING TECH MOBILE TECH
Projected Operating Income Mix
BitstreamCLEAR Fonts, BLURRY Future.
Investment Thesis
Source: Company Documents and Student Analysis.
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III. High price due for a fall
Stock up over 50% in ~90 days since launch ofmobile browser
Yet fundamentalsremain unchanged
EBITDA MultipleSkyrocketed from 13.5xto 22.0x
$4
$5
$6
$7
$8
$9
J-09 A-09 J-09 O-09 J-10
BITS Price
New Mobile
Browser launch
22.0x
13.5x
BitstreamCLEAR Fonts, BLURRY Future.
Investment Thesis
Source: Company Documents and Student Analysis.
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AgendaExecutive Summary
Company Overview
Investment ThesisValuation Methodology
Q&A
BitstreamCLEAR Fonts, BLURRY Future.
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2005A 2006A 2007A 2008A 2009E 2010E 2011E
EV/EBITDA BITS Peer Average
BITS is trading at a premium to peers
Source: Company Documents and Student Analysis.
BitstreamCLEAR Fonts, BLURRY Future.
Valuation Methodology
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-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%10%
12%
14%
2008A 2009E 2010E 2011E
YOY Revenue Growth BITS Peer Average
BITS is trailing in Revenue Growth
Valuation Methodology
Source: Company Documents and Student Analysis.
BitstreamCLEAR Fonts, BLURRY Future.
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2008A 2009E 2010E 2011E
EBITDA Margin BITS Peer Average
BITS EBITDA Margins are below Peer Average
BitstreamCLEAR Fonts, BLURRY Future.
Source: Company Documents and Student Analysis.
Valuation Methodology
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Discounted Cash Flow Valuation for Bitstream
Dollars in thousands, except per share
FY 09E FY 10E FY 11E FY 12E FY 13E FY 14E
Free Cash Flow to the Firm 1,257$ 2,021$ 2,054$ 2,020$ 2,267$ 2,431$
WACC @ 10 .53% 0.905 0.819 0.741 0.670Perpetuity Growth 4.5%
Terminal Value @ FY 14E 42,116
Enterprise Value 35,036
Less: Long-Term Debt 0Add: Non-Operating Assets 17,431
Equity Value 52,467
DCF Value Per Share $5.12
Projected Fiscal Years
BitstreamCLEAR Fonts, BLURRY Future.
Source: Company Documents and Student Analysis.
Valuation Methodology
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Valuation Summary
BitstreamCLEAR Fonts, BLURRY Future.
Source: Company Documents and Student Analysis.
Valuation Methodology
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Risks to our recommendation
External factors:
Faster than expectedeconomic recovery
Weaker dollar
Market inefficiency
Takeover risk
Internal factors:
Improved operationefficiency
Signing new largecontract
Technology innovation
Stock buy back ordividends
BitstreamCLEAR Fonts, BLURRY Future.
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AgendaPresentation Summary
Company Overview
Recommendation and SupportValuation Methodology
Q&A
Bitstream CLEAR Fonts BLURRY Future