A Font-Tastic Tech Widget You Must Have

You don't think about them, but you use them every day. Unless you live in a cave. In which case, you're not reading this.

Fonts are invaluable to the tech world. Without them, the latest computer, phone, or tablet becomes little more than an oversized paperweight. In the tech industry, infamous for extreme volatility, a readable display interface remains a constant necessity. Monotype Imaging (Nasdaq: TYPE  ) , a leading worldwide provider of typefaces, is continually researching ways to make fonts even more irreplaceable. It sounds like a great idea, and it may be just the company your portfolio needs.

Putting its best typeface forward
Besides owning the intellectual property rights to some of the world's most widely recognized fonts (Arial and Times New Roman, anyone?), Monotype also provides font-scaling software to printer companies. Because of its software's near universality in the printer industry, every document you print looks the same, no matter where you print it .

The problem here (and the reason you've probably never heard of the company) is that the printer industry has grown at an almost mind-numbingly sluggish pace. This has made Monotype look like a niche company and appear dull to the typical Wall Street hotshot.

Well aware of its need to adapt, Monotype has split its company structure into two branches. The first caters to the gadget makers and sticks fonts in practically every kind of product you can think of, from iPhone apps and televisions to GPS systems, and so forth. The second offers services and software for font management (including font scaling software) and licensing. Monotype doesn't get paid every time your child types an English paper in Comic Sans, per se, but it does make a pretty penny by giving tech companies the use of its fonts in their programs.

The monetary potential for that second branch, called Creative Professionals, doesn't stop there. During its second-quarter conference call, CEO Douglas Shaw mentioned that the company is cultivating long-term partnerships that include Amazon.com and Google. While relatively little has come to fruition just yet, the company hopes to use these relationships as leverage into the world of digital publishing. This could lead to Monotype fonts on every Kindle (which has apparently racked up 1 million unit sales in three consecutive weeks) and Nexus Tablet (estimated to have made between 700,000 and 800,000 unit sales during Q3 2012), and that's just the beginning. When you need to boost your visibility, hitching your wagon to companies that rule the world is never a bad place to start.

Collaborating with your competition doesn't hurtm either. Monotype has partnered up with Adobe Systems (Nasdaq: ADBE  )  , arguably its greatest opponent, to give more than 1,000 fonts to Adobe's Typekit, a service that gives Web designers the opportunity to easily license and use professional fonts for sleeker Web pages. Rather than treat its rival acrimoniously, Monotype works amicably with Adobe to get an extra oomph of publicity. Monotype generally makes a minimum $25.99 per font product sold, so this ability to cooperate could become quite lucrative in the long run.

A font of potential
Monotype may play nice with peers, but there could still be a smudge or two on the financial statements. Let's look at the company's annual statistics to see how it has measured up and then evaluate Q2 of 2012.

Year

Revenue

Operating Margin

Net Profit Margin

Free Cash Flow

P/E

2011

$123.2 million

31%

18%

$37.2 million

24

2010

$106.6 million

31%

17.2%

$32.6 million

21

2009

$94 million

28%

14%

$25.5 million

23

2008

$110.9 million

30.4%

13.8%

$29.4 million

13

2007

$105.1 million

30.6%

8%

$26 million

57

Source: 10-Ks for 2009-2011.

The recession momentarily knocked the wind out of Monotype, and its 2007 P/E was humongous compared with the industry's standard of 21, as the company had a smaller net income and larger market cap than normal. By and large, though, the company has maintained solid financials since going public in 2007.

From a quarterly perspective, everything appears stable as well. Free cash flow suffered during Q2 of 2012 because of an acquisition of smaller font company Bitstream, but the net profit margin remains 18%, exactly where it was this time last year. Revenue, meanwhile, is up 20% from where it was in June 2011. These are promising stock stats for an ambitious organization. 

Is This a Times New Roman empire?
While still a very young public company, Monotype Imaging appears to be doing everything just right -- for the moment, anyway. If it can achieve its huge upcoming goals while still keeping up strong financials -- and if humanity doesn't magically decide it no longer needs letters or symbols to communicate -- the future could be very bright for this unique company.

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Caroline Bennett and The Motley Fool have no positions in the stocks mentioned above. Motley Fool newsletter services recommend Adobe Systems. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 25, 2012, at 2:52 PM, TMFCane wrote:

    My cave is fully stocked with fonts! Although I must admit, the potential of a Times New Roman Empire sounds intriguing.

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