Sonic Foundry Reports First Quarter 2009 Results

MADISON, Wis. – February 5, 2009 – Sonic Foundry, Inc. (NASDAQ: SOFO), the recognized market leader for rich media webcasting and knowledge management, today announced financial results for its fiscal 2009 first quarter:

• Revenues of $4.0 million, up 59 percent from fiscal Q1 2008 revenues of $2.5 million
• Service revenues of $2.2 million, up 44 percent from Q1 2008
• Billings total $4.0 million compared to $2.5 million in the first quarter of 2008
• GAAP net loss of $1.2 million or $(0.03) per diluted share compared to $3.5 million or $(0.10) per diluted share in the first quarter of 2008
• Non-GAAP net loss of $932 thousand or $(0.03) per diluted share compared to non-GAAP net loss of $3.0 million or $(0.09) per diluted share in the first quarter of 2008
• Deferred revenue balance of $4.6 million at December 31, 2008 compared to $3.2 million at December 31, 2007
• Operating expenses total $4.3 million, down 20 percent from $5.5 million during the first quarter of fiscal 2008 at which time the company initiated a cost reduction plan

Non-GAAP net income primarily excludes all non-cash related expenses of stock compensation, depreciation, amortization and includes the cash impact of billings not recognized as revenue. Reconciliation between GAAP and non-GAAP results is provided at the end of this press release.

Revenues for the first quarter fiscal 2009 reflect the positive results of greater market focus in the education and training sectors, resulting in a 59 percent increase from the first quarter of 2008. The positive performance combined with favorable working capital requirements led to positive cash flow provided by operating activities of $9 thousand compared to cash used in operating activities of $1.7 million during Q1 2008. Since implementing a cost reduction plan in the second quarter of fiscal 2008, the company has realized dramatic improvement in cash flows from operating activities. Cash provided by operating activities was $82 thousand for the nine-month period from April 1, 2008 through December 31, 2008, which compares favorably to cash used in operating activities of $4.2 million for the nine-month period from July 1, 2007 through March 31, 2008.

The company achieved 13 percent higher year-end deferred revenue than originally forecasted, leading to a balance of $4.6 million at December 31, 2008. Of the deferred revenue balance, the company expects to realize $2.0 million in the upcoming quarter. Service revenues were $2.2 million, an increase of 44 percent from Q1 2008. As reported in fiscal 2008 results, a greater mix of service revenue is favorable to gross margin and led to increased gross margins of $3.1 million or 78 percent for the first quarter, up from $1.9 million or 75 percent in the prior year. Revenue from service contracts are recognized over the life of the contract.

Billings to higher education customers totaled 61 percent of total billings for the first quarter, an increase from 31 percent in the first quarter of 2008. The company has sold to more than 600 education customers to date. While some colleges are bracing for budget cuts, many schools are experiencing increased enrollment demand. Industry-wide layoffs are leading increasing numbers of adults seeking the flexibility of online courses for retraining and continuing education. Passage of the federal stimulus package may also have a positive impact on Sonic Foundry, depending on the approved levels of spending and the specific areas of spending concentration.

According to Gartner research analysts Marti Harris, Jan-Martin Lowendahl and Bill Rust in a January 28, 2009 report, Predicts 2009: Education Faces Challenges in a Difficult Economy, “IT organizations will be asked to make infrastructure changes needed to support a growing number of online course offerings as students and prospects look for course options that allow them to continue to work, live at home and save on travel expenses… By 2012, enrollment in online courses will be greater than 30 percent of total higher education enrollment in the Western world.”

Domestic higher education licensed sales to new customers for the first quarter of fiscal 2009 included Arizona Western College, Casper Community College in Wyoming, East Carolina University School of Business, Johns Hopkins University School of Nursing, New Mexico State University Health and Social Services, Owensboro Community and Technical College, Temple University Fox School of Business, Texas Tech University, University of Connecticut Department of Chemistry, University of Iowa College of Business Administration and University of Wisconsin Rock County.

The slower seasonal quarter for education in the U.S. was offset by strong international sales to education customers. Total international sales accounted for approximately one third of the quarter’s billings, including $740 thousand of billings to a single new international customer. The company has received additional commitments from this customer of approximately $1.2 million that are expected to be included in remaining 2009 fiscal quarters. Among the new international customers are Universite de Bordeaux, Universite de Poitiers, University of Johannesburg, Universitat Marburg and University of Stavanger.

Outsourced webcasting services for training events resulted in $477 thousand or 12 percent of total billings for the quarter, a 72 percent increase year over year. Sonic Foundry Event Services customers are typically corporate meeting planners, communication executives or training directors planning either large, multi-room, multi-day events or high-profile live events such as press conferences or product launches. The company anticipates demand for event webcasting will continue to increase as organizations impose further travel constraints on employees.

“While we as a nation are facing some of the most extreme fiscal conditions since the Great Depression, Sonic Foundry continues to be cautiously optimistic about our potential for growth. As history indicates, education and professional development traditionally remain in-demand during times of financial crisis,” said Rimas Buinevicius, chairman and CEO of Sonic Foundry. “We have not only adapted to this new economic landscape, but also crafted a well-positioned business model for the times we face.”

The company received notice from NASDAQ on October 22, 2008 that, in response to extraordinary market conditions, NASDAQ was suspending enforcement of the minimum bid price requirement of $1.00 per share for 90 days. Sonic Foundry received an additional notice on December 23, 2008 that NASDAQ extended the suspension of the minimum bid price for an additional 90 days. The rule suspension provides more time for companies to regain compliance with the minimum $1 per share requirement. Without further suspensions of the rule, Sonic Foundry will need to regain compliance with the minimum bid price by September 2009.

Sonic Foundry will host a corporate webcast today for analysts and investors to discuss its first quarter fiscal 2009 results at 3:30 p.m. CT / 4:30 p.m. ET. It will use its patented rich media communications system, Mediasite, to webcast the presentation for both live and on-demand viewing. 

To supplement our financial results presented on a GAAP basis, we use the measure of non-GAAP net income or loss in our financial presentation, which exclude certain non-cash costs and include certain cash billings not recognized as revenue for GAAP purposes. Our non-GAAP financial measure is not meant to be considered in isolation or as a substitute for comparable GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the factors management uses in planning for and forecasting future periods. Our non-GAAP financial measures reflect adjustments based on the following items:

• Billings not recorded as revenue: We have included the cash effect of billings not recorded as revenue, which are deferred for GAAP purposes, in arriving at non-GAAP net income or loss. Our services are typically billed and collected in advance of providing the service which requires minimal cost to perform in the future. Billings are a better indicator of customer activity and cash flow than revenue is, in management’s opinion, and is therefore used by management as a key operational indicator.

• Depreciation and amortization of intangible and other assets expenses: We have excluded the effect of depreciation and amortization of assets from our non-GAAP net income or loss. Amortization of intangible assets expense varies in amount and frequency and it is significantly affected by the timing and size of our acquisitions. Depreciation and amortization of asset costs is a non-cash expense that includes the periodic write-off of tooling, product design and other assets that contributed to revenues earned during the periods presented and will contribute to future period revenues as well.

• Stock-based compensation expenses: We maintain an employee qualified stock option plan under which we grant options to acquire common stock to eligible employees. We also maintain an employee stock purchase plan under which common stock may be issued to eligible employees at a reduced price. Stock-based compensation expenses are recorded for these plans in accordance with Statement of Financial Accounting Standard No. 123R, Share-Based Payment – an Amendment of FASB Statement Nos. 123 and 95. Stock-based compensation expense is a non-cash expense. As a result, we have excluded the effect of stock-based compensation expenses from our non-GAAP net income or loss.