Monotype Imaging Holdings: Putting its best font forward
What is so exciting about font?
If the above sentence hasn't convinced you that a lot of people take the print on their computer or cell phone screen very seriously, consider this: college dropout and Apple Inc. (Nasdaq: AAPL) founder Steve Jobs believes that a calligraphy class he audited years ago might have led to the most valuable lesson learned during his short stint at Reed College.
Years later, during a commencement address at Stanford University, Jobs waxed nostalgic about all the different typefaces he learned, how different space sizes between letters completely changed the look and the feel of the printed word, and how this knowledge came in handy when he was working on the design of the first Macintosh computer.
Monotype Imaging Holdings Inc. (Nasdaq: TYPE) of Woburn, Mass., is a company that gets the importance of typeface. The small cap, which went public last year, specializes in text imaging technology that can bring higher-quality and more varied fonts to a range of electronic devices like laser printers, digital copiers, mobile phones and digital televisions.
It emerges as a publicly traded company at a time when more and more people are recognizing — either consciously or subconsciously — the importance of type to make work documents look more professional, cell phone address books prettier and MySpace pages more eye-catching.
Clearly the business of spacing between letters is not as compelling as world peace, breakthrough cancer treatments, or even holiday retail sales. And investors were slow to pick up on the promise of this company, which went public in July at $12 per share and gained a mere nickel on its first day of trading to close at $12.05. But, for a slow-and-steady behind-the-scenes sort of business, it's done quite well since then. Shares eventually moved as high as $17.69 per share and are now trading at $15.40.
During fiscal 2006, Monotype's sales rose to $86.2 million from $73.8 million. The company is profitable as well; it reported net income last year of $7.1 million — unchanged from the year-ago quarter, before factoring in an adjustment for preferred shares, which produced a net loss applicable to common shareholders of $17.3 million.
The company's performance in recent quarters has been solid, if a bit underwhelming. Revenue, in fact, has been virtually unchanged at $25 million to $26 million over the last three quarters, and net income has sputtered between $1.5 million and $2 million (again, before factoring in preferred stock adjustments that produced net losses applicable to common shareholders).
Ralph Schackart, an analyst with William Blair & Co., says that relatively flat performance of late — which is due in part to increased R&D spending — obscures a number of factors that make the company an excellent long-term investment. Schackart highlights the company's gross margin above 86%, a more than 50% share of the typeface technology market, and ultra-low capital spending requirements, estimated at just $3.2 million in 2007 and 2008.
Indeed, forecasts going forward show the company stands to benefit more and more from demand for its technology and its high-operating margins. Five analysts who follow the company predict that earnings per share will total $0.53 this year and will grow to $0.66 in 2008 (comparable year-ago figures are unavailable since Monotype Imaging only recently went public.) Those analysts forecast the company's sales will total $104 million this year and will grow to $112.3 million next year. Monotype does not just develop fonts but makes a variety of font scaling and compression technologies that make it easier for these fonts to be embedded into a range of consumer devices.
Earlier this year, for example, it released an iPhone Compatibility Font Set, to make more fonts available over the iPhone, which it said would contribute to a superior cell phone user experience.
One way to understand this business is to consider the proliferation of ring tones in recent years. Since the dawn of the telephone, people had lived perfectly happily with a single basic “ring.” But then they realized they had the technology to change tones, customize them and add a little personality or holiday cheer. Fonts are similar. Nobody needs anything other than a standard font, but the printed word becomes a lot more interesting and expressive when there are different ways to present it. The humble font has become a key point of differentiation in today's highly competitive consumer electronics market.
Apple's Jobs understands this as well as anybody. "It was beautiful, historical, artistically subtle in a way that science can't capture and I found fascinating," he has said of his early study of calligraphy. Clearly the success of Apple Inc.'s products reflects this attention to detail and style that so many rivals are trying to mimic. In such an environment, demand for Monotype Imaging's (TYPE) technology is poised for further growth.
