Sonic Foundry Reports Fourth Quarter and Fiscal 2008 Year-End Results

2008 Fiscal Year

• Billings total $17.8 million compared to $18.1 million in 2007
• Revenue totals $15.6 million compared to $16.7 million in 2007 with a 65 percent increase in services revenue
• Cash used in operating activities decreased 34 percent
• GAAP net loss of $7.8 million or $(0.22) per diluted share compared to $6.4 million or $(0.18) per diluted share in 2007

Non-GAAP net income primarily excludes all non-cash related expenses of stock compensation, depreciation, amortization and one time severance payments 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.

As previously reported, the company initiated measures in January 2008 to deemphasize corporate enterprise sales and to concentrate efforts within the higher education and corporate training sectors. Continued progress was seen in the fourth quarter resulting in positive non-GAAP net income of $298 thousand or $0.01 per share, marking the second straight quarter with non-GAAP net income. The positive non-GAAP performance combined with favorable working capital requirements led to an increase in cash from June 30, 2008. The company's cost reduction strategy reduced quarterly operating expenses throughout the year, ultimately limiting the yearly operating expense increase to just $57 thousand.

Sonic Foundry achieved 18 percent higher year-end deferred revenue than originally forecasted, leading to a balance of $4.7 million at September 30, 2008. Of the deferred revenue balance, the company expects to realize $2.2 million in the upcoming quarter. Recorder unit shipments increased 7 percent from 720 to 776, while service revenue was $7.0 million, a 65 percent increase over fiscal 2007 due primarily to an increase in event and content hosting services as well as new and renewed support contracts. Gross margins were $11.4 million or 73 percent for the fiscal year, compared to $12.6 million and 75 percent in the previous year. The decrease in gross margins is due to discount pricing related to an increase in higher volume transactions and incentive programs for end of life hardware upgrades.

Billings to higher education customers totaled 57 percent of total billings for the year, an increase from 35 percent in fiscal 2007. The company has sold to more than 600 education customers to date.

Sonic Foundry remains focused on the education and corporate webcasting-as-a-service markets given historic evidence that these sectors thrive during a slow economy. Demand for online training and event webcasting in the corporate enterprise is expected to increase as companies look to cut travel costs yet maintain company-wide communication and alignment. Likewise, enrollment in colleges and universities traditionally either remains stable or increases during an economic slowdown, particularly as workers seek retraining and graduate degrees.

Domestic higher education licensed sales to new customers for the fourth quarter of fiscal 2008 included Harrisburg University of Science and Technology, Louisiana State University, Los Angeles Harbor College, Texas Southern University, The Citadel, Touro University Nevada, University of Arizona College of Law, University of New Mexico, University of Southern Nevada, University of Washington School of Dentistry and William Carey University. International sales amounted to 19 percent of yearly billings and continue to strengthen with new customers at Algonquin College, Institute of Physics - London, Liverpool Hope University, London Business School and University of Witwattersrand.

Outsourced webcasting services for training events resulted in $1.4 million or 8 percent of total billings for the year, a 132 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.

Additional highlights of fiscal year 2008 include:

• The introduction of Mediasite 5.0 and the next generation of Mediasite RL and ML Recorders at InfoComm in Las Vegas. The release includes more than 100 new features.
• Being named Best Webcasting Platform for the second consecutive year in the Streaming Media Magazine Readers' Choice Awards.
• The announcement of the 1000^th Mediasite customer, Penn State University Dickinson School of Law, and 3500^th Event Services webcast for Fiserv.
• Representation from nearly 200 individuals, representing 30 states, seven countries and 95 organizations at UNLEASH 2008, the company's second annual Mediasite User Conference.
• Continued partnership with the leading higher education conferences in the nation including the the Chronicle of Higher Education, EduComm, Sloan Consortium and EDUCAUSE, where the company streamed key conference sessions live for the first time.

"Over the last year, Sonic Foundry refined its operations and solidified its strategy for addressing both the academic and corporate online learning marketplace. As a result, we are well positioned for future growth," said Rimas Buinevicius, chairman and CEO of Sonic Foundry. "Given the historic stability of the education market during times of economic uncertainty, coupled with increasing demand for outsourced services, we are confident that we can achieve our near-term objectives and thrive in fiscal 2009."

Sonic Foundry will host a corporate webcast today for analysts and investors to discuss its fiscal 2008 year-end 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. 

EXPLANATION OF NON-GAAP MEASURES

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. These costs include stock-based compensation which we believe is helpful in understanding our past financial performance and our future results. 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:

• Stock-based compensation expenses: We adopted FASB Statement No. 123R, Share-Based Payments, on October 1, 2005, under the modified prospective method. Statement 123R requires us to record non-cash operating expenses associated with stock option awards at their estimated fair values. Prior to our Statement 123R adoption, we were required to record stock-based compensation expenses at intrinsic value, which was zero since we only issue stock options at the market price of our stock on the date issued. In accordance with the modified prospective method, our financial statements for prior periods have not been restated to reflect, and do not include, the changes in methodology to expense options at fair values in accordance with Statement 123R. Stock-based compensation is a key incentive offered to our employees. We believe such compensation contributed to the revenues earned during the periods presented and also believe it will contribute to the generation of future period revenues. As a result, we continue to evaluate our business performance excluding stock-based compensation expenses.
• Depreciation and amortization of intangible and other assets expenses: We have excluded the effect of depreciation and amortization of assets from our non-GAAP forma 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.
• 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.