Sonic Foundry Reports Second Quarter 2010 Results

MADISON, Wis. – April 29, 2010 – Sonic Foundry, Inc. (NASDAQ: SOFO), the recognized market leader for rich media webcasting and knowledge management, today announced financial results for its fiscal 2010 second quarter. Results include:

• Revenues of $4.9 million, a 9 percent decrease from fiscal Q2 2009 revenues of $5.4 million
• Service revenues of $2.4 million, up 11 percent from Q2 2009
• Billings total $4.8 million compared to $5.5 million in the second quarter of 2009
• GAAP net loss of $131 thousand or $(0.04) per diluted share compared to revised loss of $188 thousand or $(0.05) per diluted share in the second quarter of 2009
• Non-GAAP net income of $56 thousand or $0.02 per diluted share compared to non-GAAP net income of $301 thousand or $0.08 per diluted share in the second quarter of 2009
• Deferred revenue balance of $4.9 million at March 31, 2010 compared to $4.7 million at March 31, 2009
• Operating expenses total $3.7 million, down 12 percent from $4.2 million during the second quarter of fiscal 2009 due to continuation of the company’s cost reduction initiatives

Non-GAAP net income primarily excludes all non-cash related expenses of stock compensation, depreciation, amortization, provision for income taxes and 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 for the second quarter of fiscal 2010 were $4.9 million. The year over year quarterly decrease in revenues and billings is primarily attributed to significant prior revenue associated with the company’s 2009 Q2 license sale to King Abdullah University. Year to date revenues are flat, totaling $9.4 million, compared to $9.4 million in revenues for the same period last year. Year to date net loss improved to $451 thousand compared to a net loss of $1.5 million for the six months ended March 31, 2009.

The company increased the balance of unearned revenue by $167 thousand or 4 percent year over year to its current level of $4.9 million at March 31, 2010. Of the unearned revenue balance, the company expects to realize $2.0 million in the upcoming quarter. Total gross margin remained steady when compared to Q2 2009 at 75 percent for the second quarter of fiscal 2010.

Total service revenue was $2.4 million, an increase of 11 percent from Q2 2009. Revenue from service contracts is recognized over the life of the contract. Service revenue includes Mediasite customer support contracts as well as training, installation, rental, event and content hosting services. Sonic Foundry Event Services customers continue to be 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.

Billings to education customers totaled 65 percent of total billings for the second quarter, an increase from 60 percent in the second quarter of 2009. Revenue from community colleges continues to increase, with year to date billings at over $1 million, already triple the entire FY2009 result. Corporate sales for the second quarter total 30% and government 3% of total billings. International sales accounted for approximately 17 percent of the quarter’s billings.

The company currently expects to see future growth in billings and revenues due to a growing number of larger opportunities found both domestically and internationally. Opportunity growth is occurring through expansion of existing customer installations along with new installations. A number of key opportunities would represent some of the largest transactions the company has executed in its history. A key driver of this demand is a growing request for online education and training and an increased comfort level with blended online learning within existing curriculums. However, the company also remains concerned with existing state budget issues that are affecting a number of state universities in the U.S and which could have an adverse effect on business in certain areas of the country.

"Once again, we exceeded our operating goals of better than pro forma breakeven while delivering further GAAP bottom line improvements during a quarter in which we were waiting out larger contracts that have been forecasted. The business is now well positioned to support both normal organic growth as well as larger revenue events, “ said Rimas Buinevicius, chairman and CEO of Sonic Foundry. “Signs of a modest global economic recovery appear to be taking hold. We remain focused on continuing to improve bottom line performance and cash flow while building our business to support larger customer engagements as they occur."

Sonic Foundry will host a corporate webcast today for analysts and investors to discuss its fiscal 2010 second 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 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.
• 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 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.