Sonic Foundry Reports Second Quarter 2008 Results

MADISON, Wis. - May 1, 2008 - Sonic Foundry, Inc. (NASDAQ: SOFO), the recognized market leader for rich media webcasting and knowledge management, today announced financial results for its fiscal 2008 second quarter:

Revenues totaled $3.9 million, up 3 percent from fiscal Q2 2007
GAAP net loss of $2.3 million or $0.06 per diluted share
Non-GAAP net loss of $1.6 million or $0.04 per diluted share
Total billings reached $4.5 million, 9 percent growth year-over-year
Service revenues of $1.7 million, up 86 percent from the second quarter last year

Non-GAAP net loss primarily excludes all non-cash related expenses of stock compensation, depreciation and amortization and one time charges associated with program and personnel reductions announced in January 2008. A reconciliation between GAAP and non-GAAP results is provided at the end of this press release.

At March 31, 2008, an accumulated $3.5 million of unearned revenue had been billed and deferred, of which the company expects to realize $1.5 million in the upcoming quarter. Recorder unit sales increased 42 percent while service billings, a majority of which are deferred, were $2.0 million. As a result, gross margins were 71 percent for the second quarter, down from 77 percent in the past year. Future recognition of service revenues is expected to cause a rebound of gross margins to previous levels.

As previously reported, the company has recently concentrated more of its selling efforts on the education sector and is now entering the two strongest seasons for U.S. educational buying. The company's higher education sales pipeline is now over 65 percent, an increase of approximately15 percent over the same quarter last year. Additionally, the company continues to experience expanded interest and purchasing internationally due in large part to growing demand in traditional and distance learning programs globally. International sales accounted for 23 percent of the quarter's billings.

The company experienced expanding market demand for more outsourced webcasting services within both the corporate and education sectors. New customers utilizing the company's webcasting and hosting services offering in the second quarter included Gulfstream Aerospace Corporation, Jackson Healthcare Systems, Lifespan, Inc., Olympus Winter & Ibe, Winston-Salem State University and Children's Healthcare of Atlanta. Service revenues increased from $913 thousand to $1.7 million year over year primarily due to an increase in event and hosting services as well as an increase in support contracts and renewals. New customers of Sonic Foundry Event Services included Aventine HealthSciences, Birmingham City University, ESSEC Business School- France and Pitney Bowes MapInfo.

Sales to education institutions represented 51 percent of the customer mix followed by corporations at 37 percent, government at 7 percent and health at 4 percent. Key higher education licensed sales for the second quarter of fiscal 2009 included Canadian Forces College, Columbia College of Missouri, New Hampshire Community College, New Mexico State University, Northwestern Health Sciences University, Sakarya University-Turkey, University of British Columbia, University of Michigan Ross School of Business and University of New Mexico.

In January 2008, the company announced the initiation of cost savings measures that were designed to focus its overall market scope and concentrate on key vertical markets while positioning the company towards breakeven or better operations. Fiscal Q2 proforma expenses included one time costs associated with certain personnel and program reductions tied to this previous effort. The company expects to report additional expenses for fiscal Q3 totaling at least $425 thousand, which will also be reported on a proforma basis.

"We continue to experience expanded demand from the leading early adopters, specifically in the business and health education markets. We believe these sectors will remain primary areas of technology investment on a global basis, even with a slowing economy," said Rimas Buinevicius, chairman and CEO of Sonic Foundry. "The advantages offered by distance learning, blended learning and webcasting services resonate strongly with economically conscious technology buyers and having the most advanced product in the market positions us well before our strongest buying season."

Sonic Foundry will host a corporate webcast today for analysts and investors to discuss its second quarter fiscal 2008 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 loss in our financial presentation, which exclude certain non-cash costs. 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, as well as the related income tax effects:

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 pro-forma net 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. Amortization expenses will recur in future periods.

Sonic Foundry, Inc. Consolidated Balance Sheets (in thousands except for share data) (Unaudited)
	March 31, 2008	September 30, 2008
Assets
Current assets:
Cash and cash equivalents	$ 3,786	$ 8,008
Accounts receivable, net of allowances of $190 and $270	4,098	5,001
Inventories	77	204
Prepaid expenses and other current assets	623	975
Total current assets	8,584	14,188
Property and equipment:
Leasehold improvements	980	975
Computer equipment	2,367	2,267
Furniture and fixtures	461	461
Total property and equipment	3,808	3,703
Less accumulated depreciation	1,857	1,520
Net property and equipment	1,951	2,183
Other assets:
Goodwill and other intangibles, net of amortization of $1,662 and $1,656	7,604	7,610
Total assets	$ 18,139	$ 23,981

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$ 1,127	$ 1,512
Accrued liabilities	958	1,023
Unearned revenue	3,464	3,314
Current portion of notes payable	333	333
Current portion of capital lease obligation	59	66
Total current liabilities	5,941	6,248

Long-term portion of notes payable	389	556
Long-term portion of capital lease obligation	44	69
Other liabilities	302	348
Total liabilities	6,676	7,221

Stockholders’ equity:
Preferred stock, $.01 par value, authorized 5,000,000 shares; none issued and outstanding	—	—
5% preferred stock, Series B, voting, cumulative, convertible, $.01 par value (liquidation preference at par), authorized 10,000,000 shares, none issued and outstanding	—	—
Common stock, $.01 par value, authorized 100,000,000 shares; 35,708,837 and 35,684,503 shares issued and 35,581,670 and 35,557,336 shares outstanding	357	357
Additional paid-in capital	184,049	183,528
Accumulated deficit	( 172,748 )	( 166,930 )
Receivable for common stock issued	( 26 )	( 26 )
Treasury stock, at cost, 127,167 shares	( 169 )	( 169 )
Total stockholders’ equity	11,463	16,760
Total liabilities and stockholders’ equity	$ 18,139	$ 23,981

Sonic Foundry, Inc. Consolidated Statements of Operations (in thousands, except for share and per share data) (Unaudited)
	Three Months Ended March 31,		Six Months Ended March 31,
	2008	2007	2008	2007

Revenue:
Product	$ 2,182	$ 2,898	$ 3,124	$ 5,484
Services	1,719	913	3,277	1,791
Other	28	10	48	19
Total revenue	3,929	3,821	6,449	7,294
Cost of revenue:
Product	1,030	790	1,539	1,533
Services	124	101	237	131
Total cost of revenue	1,154	891	1,776	1,664
Gross margin	2,775	2,930	4,673	5,630

Operating expenses:
Selling and marketing	3,330	3,043	6,876	5,547
General and administrative	736	1,104	1,714	2,074
Product development	982	806	1,928	1,481
Total operating expenses	5,048	4,953	10,518	9,102
Loss from operations	( 2,273 )	( 2,023 )	( 5,845 )	( 3,472 )

Other income, net	( 5 )	111	27	131
Net loss	( 2,278 )	$ ( 1,912 )	( 5,818 )	$ ( 3,341 )

Net loss per common share:
– basic and diluted	$ ( 0.06 )	$ ( 0.05 )	$ ( 0.16 )	$ ( 0.10 )

Weighted average common shares – basic and diluted	35,572,140	35,368,667	35,566,949	33,881,848

Sonic Foundry, Inc. Non-GAAP Consolidated Statements of Operations (in thousands)
	Fiscal Quarter Ended March 31, 2008			Fiscal Quarter Ended March 31, 2007
	GAAP	Adj(1)	Non-GAAP	GAAP	Adj(1)	Non-GAAP

Revenues	$ 3,929	—	$ 2,520	$ 3,821	—	$ 3,821
Cost of revenue	1,154	—	622	891	—	891
Total operating expenses	5,048	( 703 )	4,345	4,953	( 395 )	4,558
Loss from operations	( 2,273 )	703	( 1,570 )	( 2,023 )	395	( 1,628 )
Other income	( 5 )	—	( 5 )	111	—	111
Net loss	$ ( 2,278 )	$ 703	$ ( 1,575 )	$ ( 1,912 )	$ 395	$ ( 1,517 )
Diluted net loss per common share	$ ( 0.06 )	$ 0.02	$ ( 0.04 )	$ ( 0.05 )	$ 0.01	$ ( 0.04 )

(1)Adjustments consist of the following:
Personnel and program reduction costs		316			—
Depreciation (in G&A)		166			156
Stock-based compensation(2)		221			239
Total non-GAAP adjustments		703			395

(2)Stock-based compensation is included in the following GAAP operating expenses:
Selling and marketing		141			155
General and administrative		24			31
Research and development		56			53
Total stock- based compensation		221			239

About Sonic Foundry®, Inc.
Sonic Foundry (NASDAQ: SOFO) is the trusted market leader for enterprise webcasting solutions, providing video content management and distribution for education, business and government. Powered by the patented Mediasite webcasting platform and webcast services of Mediasite Events, the company empowers people to advance how they share knowledge online, using video webcasts to bridge time and distance, enhance learning outcomes and improve performance.

Sonic Foundry Reports Second Quarter 2008 Results

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