Sonic Foundry Reports Fourth Quarter and Fiscal 2010 Year-End Results

MADISON, Wis. - November 18, 2010 - Sonic Foundry, Inc. (NASDAQ: SOFOD), the recognized market leader for rich media webcasting and knowledge management, today announced financial results for the fourth fiscal quarter and fiscal year ended September 30, 2010. Results include:

2010 Fiscal Fourth Quarter

• Revenues of $5.4 million, up 32 percent from the 2009 fiscal fourth quarter
• Billings of $6.3 million compared to $4.7 million in the fiscal fourth quarter of 2009, up 34 percent year over year
• GAAP net income of $126 thousand or $0.03 per basic and diluted share compared to a net loss of $(1.0) million or ($0.27) per share in the fiscal fourth quarter of 2009
• Non-GAAP net income of $1.3 million or $0.35 per basic share compared to a loss of $(142) thousand or $(0.04) per share in the fiscal fourth quarter of 2009
• Unearned revenue balance of $6.1 million compared to $5.2 million at June 30, 2010, reflecting increases in the renewal rate of customer support contracts, event billings and hosting services
• Operating expenses of $3.8 million, reduced 6 percent from $4.1 million during the fourth quarter of fiscal 2009
• Services revenue of $2.4 million, up 16 percent from $2.1 million in the fourth quarter of fiscal 2009
• Event services and hosting billings total $1.3 million, up 40 percent from $931 thousand during the fourth quarter of fiscal 2009

2010 Fiscal Year

• Revenues of $20.5 million compared to $18.6 million in 2009
• Billings of $21.3 million compared to $19.2 million in 2009
• Cash provided by operating activities was $593 thousand
• Operating expenses were reduced 9 percent from $16.7 million in 2009 to $15.1 million in 2010
• Services revenue increased 12 percent from $8.8 million in 2009 to $9.8 million in 2010
• GAAP net loss was $(122) thousand or $(0.03) per share compared to a loss of $(2.6) million or $(0.74) per share in 2009
• Non-GAAP net income was $1.7 million or $0.48 per basic share compared to non-GAAP net loss of $(693) thousand or $(0.19) per share in fiscal year 2009

Non-GAAP net income primarily excludes all non-cash related expenses of stock compensation, depreciation, amortization, provision for income taxes 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. Per share numbers have been adjusted for the 1 for 10 reverse stock split which occurred in November 2009.

Revenues and billings for fiscal 2010 reached their highest level since the divestiture of two business units in 2003. Cash provided by operating activities totaled $593 thousand compared to fiscal 2009 where cash of $1.5 million was used in operating activities. Year over year revenues are up 10 percent, from $18.6 million in fiscal 2009 to $20.5 million in fiscal 2010. Net loss for the fiscal year improved from $(2.6) million in 2009 to $(122) thousand in 2010, and fiscal year end non-GAAP results improved from a loss of $(693) thousand to income of $1.7 million for the same period.

The company increased the balance of unearned revenue by $801 thousand or 15 percent, year over year, to its current level of $6.1 million at September 30, 2010. Of the unearned revenue balance, the company expects to realize $2.2 million in the quarter ending December 31, 2010. Full year 2010 total gross margin was 75 percent.

Total services revenue was $9.8 million, an increase of 12 percent from fiscal 2009 due primarily to a greater number of customer support contracts and billings for hosting and event services. Revenue from service contracts is recognized over the life of the contract. Services revenue includes Mediasite customer support contracts as well as training, installation, rental, event and content hosting services. 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.

In fiscal 2010, 70 percent of billings were to preexisting customers compared to 62 percent in fiscal 2009.  This increase typically reflects follow on sales to existing customers as they expand their campus-based lecture capture and content management footprint. Billings to education customers totaled 59 percent of total billings for the fiscal year. Billings to community colleges continue to increase, with fiscal 2010 billings of $1.3 million, almost three times higher than the entire fiscal 2009 result.  Corporate billings for the fiscal year total 29 percent, government billings total 7 percent and international billings total 19 percent.

Recently, the company's Mediasite platform was recognized as the global market leader for lecture capture by Frost & Sullivan in the third consecutive report, and voted best webcasting platform by Streaming Media readers for the fourth consecutive year.

"Webcasting, lecture capture and hybrid events are increasingly becoming a communication mainstay for modern colleges, businesses and government agencies. This quarter also saw breakout performance from our event services business, an area of development that we have focused on these last few years.  Together, the corresponding uptick in growth is reflected through a rapidly building market acceptance for premiere webcasting of knowledge, learning and training," said Rimas Buinevicius, chairman and CEO of Sonic Foundry. "Through recent quarters, the company's performance has improved steadily.  For 2011 we will remain focused on customer acquisition, relationship building and further business development, all with an eye on continuing to improve our operating performance."

Sonic Foundry will host a corporate webcast today for analysts and investors to discuss its fiscal 2010 and fourth quarter results at 9:00 a.m. CT / 10:00 a.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 a measure of non-GAAP net income or loss in our financial presentation, which excludes certain non-cash costs and includes 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.
• Non-cash provision for income taxes: We have excluded the impact of the provision for income taxes from our non-GAAP net income or loss. The provision for income taxes is associated with the difference in treatment of goodwill which is not expensed for GAAP purposes but is amortized over a fifteen year life for Federal income tax purposes. The result is a non-cash expense and liability that will never be paid.

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 FASB Accounting Standards Codification subtopic 718, Compensation-Stock Compensation. 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.