Monotype Imaging Holdings Inc【TYPE】株式ニュース

Monotype Imaging Looks To Print Money
Mar 14 2013, 10:40 | 2 comments | about: TYPE, includes: ADBE, GOOG, HPQ
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Fonts and typefaces fall into that group of technologies that nobody thinks about unless/until they fail or don't look right. Monotype Imaging (TYPE) makes sure that doesn't happen often, as it is a leading developer of text imaging software and solutions. Although the shares look reasonably valued today, more success in emerging end-market opportunities could lead to better-than-expected performance down the line.

Legibility Is Underrated

OEMs use Monotype's technology in consumer products like printers, mobile handsets, and automobiles. These fonts are embedded in products like laser printers or phones and allow the devices to present clear, easy-to-read text in a variety of fonts. Monotype owns or licenses more than 13,000 typefaces, and as these are trademarked (not patented), Monotype effectively has a moat around them indefinitely.

It's not just Monotype's library of typefaces that makes it an interesting OEM partner. The company's scaling technology produces real storage savings in comparison to storage-intensive bitmaps, and that's a key advantage for OEMs. It's also worth noting that scaling isn't as simple as it might sound - scaling Roman letters isn't that complicated, but compressing non-Western scripts like Chinese or Sanskrit without losing legibility is another matter.

Moving From Printers To New Devices

Six years ago, Monotype generated about 70% of its revenue from printer OEMs like Hewlett-Packard (HPQ), Lexmark (LXK), and Canon (CAJ). In the intervening years, there have been some hard times for the major printer manufacturers. Even so, I think investors may not realize that overall printer shipments haven't evaporated - a number of other printer manufacturers (most of them located in Asia) have increased their unit share, and given that Monotype's royalties are unit-based, that's kept the business in relatively good shape.

All told, the printer market is probably worth about $200 million or so today, with Monotype holding about 30% share. While there are ongoing opportunities from products like page description language (PDL) and print drivers, there will be competition from companies like Software Imaging and regional specialists (companies focused on fonts/typefaces for particular languages or language groups). Though some analysts believe this could still be a high single-digit growth market (and Monotype hasn't historically seen much price pressure), I'm more inclined to assume a lower growth outlook in the low-to-mid single digits.

On the other hand, I think Monotype could see significant growth in its display imaging business - a business producing around one-quarter of the company's revenue today. Here the company looks to license its font technology to the makers of mobile handsets, tablets, e-readers, and so on. In addition, the company is increasingly looking to markets like automobiles and TVs as future growth drivers.

How much could this be worth? I had a difficult time tracking down a solid global printer unit sales number, but it seems like the number is in the 30 million to 40 million range. By comparison, there could be 200 million e-readers and tablets in play by 2015 and over 2 billion handsets. Users need clear and legible fonts on these devices just as much as on printed pages, and this could be a market worth $500 million or more to Monotype.

Playing The Switch To Digital Media

Monotype also has something to gain from the transition of print media to web-based content. Redesigning media for the web requires fonts and scaling technologies too, particularly as designers need to move away from options like using gifs or jpegs for reasons of search engine optimization.

Monotype certainly has relevant experience and technology here, but this could be a more competitive market space over the years. Adobe (ADBE) and Google (GOOG) are both partners and competitors for the company, and other players like Extensis and Insider Software are looking at many of the same market opportunities. Even so, this is a market that could be worth more than $200 million in revenue, and it seems to be growing at a very good clip (revenue was up nearly 90% in the fourth quarter of 2012).

Reasonable Growth Prospects And Solid Margins

All told, Monotype could be serving markets with $1 billion in revenue potential - a sizable number relative to its 2012 annual revenue number of $150 million. While I think the printer market is likely to be a lower-growth market, the prospects in display and the "creative professional" market are brighter and these markets could easily post high single-digit growth over the next five to 10 years.

I am looking for Monotype to grow sales at a long-term rate of about 8%. Much of this is predicated on the company gaining share in display markets like e-readers, tablets, phones, and cars similar to what it has achieved in printers. Clearly, then, there are competitive risks to the revenue number if OEMs find better scaling/compression solutions.

One of the attractive parts of this story is that the company has an inherently high-margin/high-cash flow business, as it is essentially a licensing/royalty business. While the company does reinvest a fair percentage of profits back into R&D, the operating and free cash flow margins are quite strong. That sort of rich profitability does carry some risk though - namely, it makes it an attractive market to try to enter, though the company's trademark IP creates at least a partial moat.

I don't really see how the company leverages its expenses significantly beyond what it has already done, though, and that leads me to a long-term free cash flow growth assumption very similar to the revenue growth. That, then, is another risk factor - this story is very much tied to success in signing up licensing partners and seeing them succeed in terms of unit volume, as the company doesn't have a lot of ways to improve margins/profits otherwise.

The Bottom Line

If Monotype can generate long-term free cash flow growth of around 8%, these shares appear to be worth around $25 today. Should the company manage a higher revenue growth rate, though, the fair value jumps as well - to about $28 at 10% revenue growth and $34 at 13% revenue growth (the company's 10-year trailing compound revenue growth rate).

All in all, this looks like an interesting stock today. There's not all that much sell-side coverage and the valuation is reasonable, and it seems like the company is well-positioned to leverage ongoing unit growth from a variety of consumer goods and a growing market for digital media.