Font business Monotype Image Holdings (NASDAQ:TYPE) might sound like one of the less sexy stocks of Wall Street's tech sector at first, but there's a whole lot of evidence to suggest otherwise. The company is in the midst of a major reinvention of its business model, which includes aligning itself with strategic partnerships that could pay out big in the long run. Here's how there's money to be found in the letters you type.
Necessity breeds reinvention
In the past, Monotype has made most of its bread and butter through the licensure of well-known fonts, as well as through selling font-scaling software to printer companies. As times progress, the printer industry has become less and less relevant, and Monotype has had to either adapt to new trends or get swept into obscurity.
Even bigger companies aren't immune to this kind of shift in the cultural tide. Adobe Systems (NASDAQ:ADBE) has a market cap of $28.2 billion, which is 23.5 times the size of Monotype, but its Print and Publishing segment has dropped 4% since 2010, to $216 million. Monotype's OEM division, which focuses on selling printers and related materials, has seen that revenue go up since 2010, from $80 million to $98.1 million. However, the company is well aware of the rapidly shrinking nature of that industry, and with CEO Douglas Shaw at the helm, the company has chosen to move in a new direction, and then some.
Monotype now generates the bulk of its revenue through its Creative Professionals segment, which provides font design options to companies in order to "ensure brand integrity and creative expression." This includes Typecast, a browser-based font designing tool that gives creative professionals complete creative control, and Skyfonts, which allows clients with an "appetite for new typefaces" to rent fonts.
So far this model is paying off. Monotype's quarterly revenue jumped 6.5% in Q3 2013, and $16.4 million of that $40.5 million came from the Creative Professionals segment. The company kept a sizable fraction of that overall amount in its profit margins. Operating income clocked in at $11.7 million, or 29% of revenue, while net income was $7.0 million, or 17.4%.
Becoming a strategic player
It would have been one thing if Monotype had simply chosen to transform its revenue model, but the company has also turned itself into an invaluable strategic asset for partnering businesses.
For example, during a conference call, Shaw said Monotype's "spectacular" relationship with educational publishing house Pearson os much different from what it was even just four or five years ago. Back then, Monotype was simply a door-to-door vendor of desktop fonts, but now the company has created a "flexible licensing model," which provides a multi-year subscription for fonts on a vast array of mediums -- from desktop, to Web display imaging, to mobile applications.
Shaw sees Monotype's relationship with Pearson as something of a guinea pig for its new model, saying he hopes to "learn from them and leverage that with other businesses" in the future.
There's another business partnership that could take Monotype very far: The company currently offers its Typecast program through Google Fonts, which Shaw says is (perhaps not surprisingly) the most popular provider of free font services. While Monotype isn't exactly breaking the bank off providing free fonts, it never hurts to be supported by the Internet's ultimate search engine. That exposure could also bring a crop of interested potential subscribers who wouldn't have otherwise known about Monotype.
The right type of company
You might not regularly think about fonts and typefaces, but they're a vital part of everyone's daily experience with the Web. With growing revenues, savvy alliances, and a practical vision of where the company could go in the future, Monotype intends to snap up market share on an underrated realm of possibility. The company is a font of earnings potential, and if Shaw has his way, that could be the case for a long time to come.
Fool contributor Caroline Bennett has no position in any stocks mentioned. The Motley Fool recommends 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.