Sonic Foundry Reports Record First Quarter Fiscal 2011 Results

MADISON, Wis. - January 27, 2010 - Sonic Foundry, Inc. (NASDAQ: SOFOD), the recognized market leader for rich media webcasting, lecture capture and knowledge management, today announced financial results for its fiscal 2011 first quarter ended December 31, 2010.

GAAP results include:

• Revenues of $5.9 million, up 32 percent over the first quarter of fiscal 2010
• Product revenue of $2.8 million, an increase of 48 percent over the first quarter of fiscal 2010
• Services revenue of $3.0 million, an increase of 19 percent over the first quarter of fiscal 2010
  • Support and maintenance revenues of $1.6 million, an increase of 7 percent over the first quarter of fiscal 2010
  • Event services and hosting revenues of $1.4 million, an increase of 37 percent over the first quarter of fiscal 2010
• GAAP net income of $223 thousand or $0.06 per basic and diluted share, compared to a net loss of $(320) thousand or ($.09) per basic and diluted share in the first quarter of fiscal 2010
• Unearned revenue balance of $5.7 million, an increase of 14 percent over the first quarter of fiscal 2010

Non-GAAP results include:

• Billings of $5.6 million, an increase of 31 percent over the first quarter of fiscal 2010
• Product billings of $2.8 million, an increase of 48 percent over the first quarter of fiscal 2010
• Services billings of $2.7 million, an increase of 17 percent over the first quarter of fiscal 2010
  • Support and maintenance billings of $1.6 million, an increase of 7 percent over the first quarter of fiscal 2010
  • Event services and hosting billings of $1.1 million, an increase of 30 percent over the first quarter of fiscal 2010
• Non-GAAP net income of $274 thousand or $0.07 per basic share compared to a net loss of $(434) thousand or $(0.12) per basic share in the first quarter of fiscal 2010

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.

Cash provided by operating activities totaled $497 thousand, reflecting the improvement of net income in Q1-2011 of $223 thousand versus a net loss of $(320) thousand in Q1-2010. Quarter ending non-GAAP results improved to an income of $274 thousand versus a loss of $(434) thousand in Q1-2010.

While the company’s first quarter is a slower seasonal quarter for North American higher education sales, this was to a large extent offset by stronger revenues reported for its event services business as well as for its international sales. Total event services and hosting revenues for the quarter were $1.4 million compared to $918 thousand in Q1-2010. International product sales accounted for 31 percent of overall revenues, compared to 26 percent in Q1-2010, and helped contribute to the 48 percent increase in overall product license revenues over the first quarter of fiscal 2010.

Of the unearned revenue balance, the company expects to realize $2.2 million in the quarter ending March 31, 2011. 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.

First quarter fiscal 2011 total gross margin was 72 percent and was affected by higher unit volume transactions as well as a higher utilization of third party labor.

In the first quarter fiscal 2011, 65 percent of billings were to preexisting customers compared to 75 percent in the first quarter fiscal 2010. Billings to education customers totaled 56 percent and corporate billings totaled 34 percent of the total billings for the quarter.

Other highlights of the first quarter fiscal 2011 include the company’s announcement of a strategic technology partnership with TechSmith, enabling Camtasia Relay content to now be managed within the Mediasite knowledge management platform. The company also announced it is the first rich media webcasting platform to be certified for deployment on secure military networks by the US Department of Defense.

We are delighted to kick off 2011 with another positive operating quarter and further demonstration of company growth across our multiple business lines. Our strategy continues to extend the value of Mediasite product and services technologies to a broadening customer base,” said Rimas Buinevicius, chairman and CEO of Sonic Foundry. “We have expended a great deal of effort and attention towards technology development as well as partnering, when it makes sense, so that a broader universe of customers is able to harness the power of Mediasite for their specific value creation needs. Sonic Foundry remains on the cusp of a growing and rapidly changing market that continues to expand its adoption of online rich media for a variety of education and training applications.

Sonic Foundry will host a corporate webcast today for analysts and investors to discuss its fiscal 2011 first quarter 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 access the presentation, go to www.sonicfoundry.com/q1. An archive of the webcast will be available for 30 days.

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.