3. Recommendation: SELL
12-month price target: $5.18
(40% downside)
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
Bitstream: Clear Fonts,
Blurry Future…
Bitstream – “CLEAR Fonts, BLURRY Future.”
7. Investment Thesis:
I. Core businesses losing market share
Products lack competitiveness
Customers moving toward proprietary
products
Absence of pricing power
Bitstream – “CLEAR Fonts, BLURRY Future.”
8. Investment Thesis:
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 M
450
3 M 27
Opera BITS
Monthly pageviews
per download
Number of Downloads
Bitstream – “CLEAR Fonts, BLURRY Future.”
Source: Company Documents and Student Analysis.
9. 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
Bitstream – “CLEAR Fonts, BLURRY Future.”
Investment Thesis:
Source: Company Documents and Student Analysis.
10. -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
Bitstream – “CLEAR Fonts, BLURRY Future.”
Investment Thesis:
Source: Company Documents and Student Analysis.
11. III. High price due for a fall
• Stock up over 50% in ~
90 days since launch of
mobile browser
• EBITDA Multiple
Skyrocketed from 13.5x
to 22.0x
• Yet fundamentals
remain unchanged
$4
$5
$6
$7
$8
$9
J-09 A-09 J-09 O-09 J-10
BITS Price
New Mobile
Browser launch
22.0x
13.5x
Bitstream – “CLEAR Fonts, BLURRY Future.”
Investment Thesis:
Source: Company Documents and Student Analysis.
13. 2005A 2006A 2007A 2008A 2009E 2010E 2011E
EV/EBITDA BITS Peer Average
BITS is trading at a premium to peers
Source: Company Documents and Student Analysis.
Bitstream – “CLEAR Fonts, BLURRY Future.”
Valuation: Market Approach
15. 2008A 2009E 2010E 2011E
EBITDA Margin BITS Peer Average
EBITDA Margins below Peer Average
Bitstream – “CLEAR Fonts, BLURRY Future.”
Source: Company Documents and Student Analysis.
Valuation: Market Approach
16. Discounted Cash Flow Valuation forBitstream
Dollars in thousands, except per share
FY 09E FY 10E FY 11E FY 12E FY 13E FY 14E
Free Cash Flow to the Firm 1,257$ 2,021$ 2,054$ 2,020$ 2,267$ 2,431$
WACC @ 10 .53% 0.905 0.819 0.741 0.670
PerpetuityGrowth 4.5%
Terminal Value @ FY 14E 42,116
Enterprise Value 35,036
Less: Long-Term Debt 0
Add: Non-Operating Assets 17,431
Equity Value 52,467
DCF Value Per Share $5.12
Projected Fiscal Years
Bitstream – “CLEAR Fonts, BLURRY Future.”
Source: Company Documents and Student Analysis.
Valuation: Discounted Cash Flow
