Bitstream Inc.

(NASDAQ:BITS)

NYSSA IRC Team D

Feb 5, 2010

Agenda
Executive Summary Company Overview Investment Thesis Valuation Methodology Q&A

Bitstream CLEAR Fonts, BLURRY Future.

Bitstream: Clear Fonts,

Blurry Future
Recommendation: SELL 12-month price target: $5.18 (-40%)
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.

Agenda
Executive Summary Company Overview Investment Thesis Valuation Methodology Q&A

Bitstream CLEAR Fonts, BLURRY Future.

BITS AND PIECES

Source: Company Documents and Student Analysis.

Bitstream CLEAR Fonts, BLURRY Future.

Agenda
Executive Summary Company Overview Investment Thesis Valuation Methodology 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 Continues

II. Mobile browser likely to disappoint
42 M 450 Late entrant into an overcrowded market Small and inactive user base On the losing end of a technology arms race 27
Page Per Month

3M
Number of Download

Opera
Source: Company Documents and Student Analysis.

BITS
Bitstream CLEAR Fonts, BLURRY Future.

Investment Thesis
50%

Projected Revenue Mix

40%

30%

20%

10%

0%
FY 09E FY 10E FY 11E FY 12E FONT TECH FONTS PUBLISHING TECH
Source: Company Documents and Student Analysis.

FY 13E FY 14E MOBILE TECH

Bitstream CLEAR Fonts, BLURRY Future.

Investment Thesis
Projected Operating Income Mix
100% 50% 0% -50% -100% -150% FY 09E FONT TECH FY 10E FONTS FY 11E FY 12E FY 13E FY 14E PUBLISHING TECH MOBILE TECH

Source: Company Documents and Student Analysis.

Bitstream CLEAR Fonts, BLURRY Future.

Investment Thesis
III. High price due for a fall
$9

BITS Price

$8

New Mobile Browser launch

$7

Stock up over 50% in ~ 90 days since launch of 22.0x mobile browser

Yet fundamentals remain unchanged EBITDA Multiple Skyrocketed from 13.5x to 22.0x
J-10

$6

$5

13.5x

$4
J-09 A-09 J-09 O-09
Source: Company Documents and Student Analysis.

Bitstream CLEAR Fonts, BLURRY Future.

Agenda
Executive Summary Company Overview Investment Thesis Valuation Methodology Q&A

Bitstream CLEAR Fonts, BLURRY Future.

Valuation Methodology
BITS is trading at a premium to peers EV/EBITDA
BITS Peer Average

2005A

2006A

2007A

2008A

2009E

2010E

2011E

Source: Company Documents and Student Analysis.

Bitstream CLEAR Fonts, BLURRY Future.

Valuation Methodology
BITS is trailing in Revenue Growth
YOY Revenue Growth
14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% BITS Peer Average

2008A
Source: Company Documents and Student Analysis.

2009E

2010E

2011E

Bitstream CLEAR Fonts, BLURRY Future.

Valuation Methodology
BITS EBITDA Margins are below Peer Average
EBITDA Margin
BITS Peer Average

2008A
Source: Company Documents and Student Analysis.

2009E

2010E

2011E

Bitstream CLEAR Fonts, BLURRY Future.

Valuation Methodology
Discounted Cash Flow Valuation for Bitstream
Dollars in thousands, except per share Projected Fiscal Years FY 09E FY 10E FY 11E FY 12E FY 13E FY 14E $ 1,257 $ 2,021 $ 2,054 $ 2,020 $ 2,267 $ 2,431 0.905 0.819 0.741 0.670 4.5% 42,116 35,036 0 17,431 52,467 $5.12

Free Cash Flow to the Firm WACC @ 10 .53% Perpetuity Growth Terminal Value @ FY 14E Enterprise Value Less: Long-Term Debt Add: Non-Operating Assets Equity Value DCF Value Per Share
Source: Company Documents and Student Analysis.

Bitstream CLEAR Fonts, BLURRY Future.

Valuation Methodology
Valuation Summary

Source: Company Documents and Student Analysis.

Bitstream CLEAR Fonts, BLURRY Future.

Risks to our recommendation

Internal factors:
Improved operation efficiency Signing new large contract Technology innovation Stock buy back or dividends

External factors:
Faster than expected economic recovery Weaker dollar Market inefficiency Takeover risk

Bitstream CLEAR Fonts, BLURRY Future.

Agenda
Presentation Summary Company Overview Recommendation and Support Valuation Methodology Q&A

Bitstream CLEAR Fonts, BLURRY Future.