Bitstream Inc. (NASDAQ:BITS)

Feb 5, 2010

Agenda Executive Summary

Company Overview

Investment Thesis

Valuation Methodology

Investment Risks

Q&A

Bitstream – “CLEAR Fonts, BLURRY Future.”

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.”

Agenda Executive Summary

Company Overview

Investment Thesis

Valuation Methodology

Investment Risks

Q&A

Bitstream – “CLEAR Fonts, BLURRY Future.”

Company Overview: BITS and pieces

Bitstream – “CLEAR Fonts, BLURRY Future.” Source: Company Documents and Student Analysis.

Agenda Executive Summary

Company Overview

Investment Thesis

Valuation Methodology

Investment Risks

Q&A

Bitstream – “CLEAR Fonts, BLURRY Future.”

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.”

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.

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.

-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.

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.

Agenda Executive Summary

Company Overview

Investment Thesis

Valuation Methodology

Investment Risks

Q&A

Bitstream – “CLEAR Fonts, BLURRY Future.”

0.0x

10.0x

20.0x

30.0x

40.0x

50.0x

60.0x

2005A 2006A 2007A 2008A 2009E 2010E 2011E

Fiscal Year

EV/EBITDA BITS

Peer Average2005A 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

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2008A 2009E 2010E 2011E

YOY Revenue Growth BITS Peer Average

BITS is trailing in Revenue Growth

Valuation: Market Approach

Source: Company Documents and Student Analysis.

Bitstream – “CLEAR Fonts, BLURRY Future.”

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

Discounted Cash Flow Valuation for Bitstream 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

Perpetuity Growth 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

Valuation Summary

Bitstream – “CLEAR Fonts, BLURRY Future.”

Source: Company Documents and Student Analysis.

Agenda Presentation Summary

Company Overview

Investment Thesis

Valuation Methodology

Investment Risks

Q&A

Bitstream – “CLEAR Fonts, BLURRY Future.”

Risks to our recommendation

External factors:

• Faster than expected

economic recovery

• Weaker dollar

• Market inefficiency

• Takeover risk

Internal factors:

• Improved operation

efficiency

• Signing new large

contracts

• Technology innovation

• Stock buy back or

dividends

Bitstream – “CLEAR Fonts, BLURRY Future.”

Agenda Presentation Summary

Company Overview

Investment Thesis

Valuation Methodology

Investment Risks

Q&A

Bitstream – “CLEAR Fonts, BLURRY Future.”