The document analyzes Bitstream Inc. (BITS) and recommends selling the stock. It finds that BITS is fundamentally overvalued, and that the positioning of its business lines limits growth potential. There are also operational concerns, such as a lack of focus on sales and marketing. The document examines weaknesses across BITS' various business units and concludes that the stock only offers 6% upside from the current price based on various valuation methodologies.

1. Michael Anderson
David Beamish
S. Raj Rajagopal
Shang Yen See
Juan Velandia

2. Fundamentally overvalued
Positioning of business lines limits SELL
growth potential BITSTREAM
Operational concerns
2

3. ‘08 Revenue Disclosures
Font Technology
Revenue: $6.1MM Services
Gross Margin: 86% Software 21%
Licenses
79%
MyFonts
Revenue: $9.6MM
Gross Margin: 26%
‘09E Revenue Breakdown
PageFlex
MyFonts Pageflex
Revenue: $6.7MM
Gross Margin: 83% 43% 30%
Font Tech
BOLT Browser 27%
Revenue: $0.1MM
Gross Margin: 20-60% BOLT
Source: Proprietary research
<1%
3

4. BITS stock price ‘08 to present High Volume Buying
14
8
12
7 10
Daily Volume (10000)
6
8
6
5
4
4 2
3 0
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jun Jul Aug Sep Oct Nov Dec Jan Feb
BITS Nasdaq
2 year mean daily volume
Source: Capital IQ
4

5. Weaknesses
Employees per division
 Allocation of resources 100
 R&D ramp up 80
 Insufficient focus on 60
sales/marketing 40
20
 Conservative corporate culture 0
97 98 99 00 01 02 03 04 05 06 07 08 09
R&D Sales & Marketing Admin
 Historic strategy has limited
exposure to growing international
markets
 Excess cash not deployed
 Showing lack of growth opportunities
Source: Bitstream website
5

6. Printers Industry Display Device Sales, 2008-2013 CAGR
 Minority duopolist with Monotype North America 2.9%
 Less than 15% market share Western Europe 5.5%
 Highly dependent on one customer Eastern Europe 7.4%
Australasia 9.2%
Display Devices
Latin America 13.5%
 FreeType has over 80% share Middle East and Africa 16.2%
 Free open-source software Asia Pacific 19.0%
 Comparable performance to BITS Source: Euromoniter
 Google funding FreeType R&D BITS Geographical Revenue Mix
100%
 Inferior product offering to 80%
60%
Monotype in Asian markets 40%
20%
0%
 Not exposed to fastest growing e-
reader products (e.g., Kindle, Nook
and iPad) North America Europe Rest of world
Source: Company reports and proprietary research
6

7.  MyFonts operates in a highly $20.0 2.5MM
Revenue per user
competitive niche online market $15.0 2.MM
1.5MM
 Management has historically only $10.0
1.MM
revealed user growth numbers, not $5.0 Users .5MM
revenue growth
$0.0 -
2004
2007
2005
2009
2006
2012
2008
2010
2011
2013
2014
 Revenue per user has actually been
falling due to: Revenue growth rate flat
20% 2.5MM
 Increased use by non professional
casual users 15% 2.MM
Users
 The resale of lower margin third-party 1.5MM
10%
fonts have increased ahead of 1.MM
proprietary fonts 5% .5MM
Revenue growth rate
0% -
2014
2011
2013
2009
2012
2010
Source: Company reports and proprietary research
7

8.  Pageflex operates in the highly Pageflex Media Exposure
fragmented data publishing market 30%
 Revenue driven by advertising spend 70%
in old and new media
 Limited growth opportunities Old Media (e.g. Print) New Media (e.g. Email)
 Historic connection to old media Old media exposure limits growth
15% New Media
 Product characteristics 10%
 Product is not the low cost solution YoY Growth rates Pageflex
5%
nor user friendly 0%
-5%
-10%
-15% Old Media
2009 2010 2011 2012 2013
Source: Mintel, Advertising Age and proprietary research
8

9. Advertising Revenue BOLT User Growth Forecast
 User behavior in flux 50
 AdMob  Google, Quattro  Apple 40
Millions
30
 Monetization doubtful
20
 Mobile advertising in infancy
10
 Highly competitive industry
0
 Opera, Mozilla Firefox
2009E 2010E 2011E 2012E 2013E 2014E
License Revenue Source: Proprietary research
 No bargaining power BITS Revenue Mix Forecast 2013
 Wireless carriers control sales channel
 Handset makers control platform BOLT, 14%
 Better substitutes
 iPhone apps, Nokia Ovi, Google Android
Other
 No barrier to entry Business
 BOLT based on free ‘WebKit’ open source Lines, 86%
Source: Proprietary research
9

10. Valuation Results by Methodology
8.5
Only 6% Upside
8.0 Current Price
Stock Price (US $)
7.5
7.0 (25%)
6.5
6.0 Target Price
5.5
5.0
4.5
4.0
DCF P/E Residual Take Out Bullish
(8.4 - 13.4% WACC) (15 – 20x) Income Analysis
(2 - 4% T. Growth) (20 – 60% EPS CAGR) (2 – 3x Sales) Bearish
10

11. Risks Probability Mitigants
Potential takeover Low  Blackberry recently bought a mobile
browser
 Adobe and Monotype have superior
technology
Major deal with handset Very Low  BITS lacks the infrastructure and
maker / wireless carrier organization
 No prior experience with global
carriers
11

12. Fundamentally overvalued
Positioning of business lines limits SELL
growth potential BITSTREAM
Operational concerns
12