Sonic Foundry Reports Second Quarter Fiscal 2011 Results

MADISON, Wis. - April 28, 2011 - 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 second quarter ended March 31, 2011.

GAAP results include:

• Revenues of $5.5 million, up 13 percent over the second quarter of fiscal 2010
• Product revenue of $2.7 million, an increase of 6 percent over the second quarter of fiscal 2010
• Services revenue of $2.8 million, an increase of 20 percent over the second quarter of fiscal 2010
  • Support and maintenance revenues of $1.7 million, an increase of 7 percent over the second quarter of fiscal 2010
  • Event services and hosting revenues of $1.2 million, an increase of 45 percent over the second quarter of fiscal 2010
• Unearned revenue balance of $5.3 million, an increase of 9 percent over the second quarter of fiscal 2010
• GAAP net loss of $(272) thousand or $(0.07) per basic and diluted share, compared to a net loss of $(131) thousand or $(0.04) per basic and diluted share in the second quarter of fiscal 2010

Non-GAAP results include:

• Billings of $5.1 million, an increase of 8 percent over the second quarter of fiscal 2010
• Product and other billings of $2.7 million, an increase of 6 percent over the second quarter of fiscal 2010
• Services billings of $2.4 million, an increase of 10 percent over the second quarter of fiscal 2010
  • Support and maintenance billings of $1.5 million, an increase of 9 percent over the second quarter of fiscal 2010
  • Event services and hosting billings of $942 thousand, an increase of 11 percent over the second quarter of fiscal 2010
• Non-GAAP net loss of $(250) thousand or $(0.07) per basic share compared to net income of $49 thousand or $0.01 per basic share in the second 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.

Year-to-date revenues are up 22 percent from YTD-2010 to YTD-2011. Revenues for the first six months of 2011 totaled $11.5 million compared to $9.4 million in the first six months of 2010.

As previously reported, cash provided by operating activities continues to improve. Despite a net loss of $(272) thousand in the second quarter of fiscal 2010, cash provided by operating activities during the first half of fiscal 2011 totaled $220 thousand versus cash used in operations of $(346) thousand for the first half of fiscal 2010. YTD-2011 net loss was $(49) thousand or $(0.01) per basic and diluted share, while YTD-2010 net loss was $(451) thousand or $(0.12) per basic and diluted share.

International product billings accounted for 30 percent of overall billings, compared to 20 percent in Q2-2010.Total event services and hosting revenues for the quarter were $1.2 million compared to $807 thousand in Q2-2010.

Of the unearned revenue balance, the company expects to realize $2.2 million in the quarter ending June 30, 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.

Second quarter fiscal 2011 total gross margin was 70 percent, compared to 75 percent in Q2-2010. Gross margin was affected by an increase in direct and outsourced event labor costs with lower markups for which the company does not provide, such as closed captioning. Gross margin was also impacted by a greater volume of discounted upgrade units for customers whose product had reached end of hardware warranty eligibility. These effects were partially offset by a lesser number of higher quantity transactions with corresponding discount pricing this year than in the prior year.

In the second quarter fiscal 2011 and 2010, 66 percent of billings were to preexisting customers. Billings to education customers totaled 56 percent and corporate billings totaled 30 percent of the total billings for the quarter.

During the second quarter fiscal 2011, the company also announced it had been granted its third patent by the U.S. Patent and Trademark Office for its flagship Mediasite product line. The patent, “Rich Media Event Production System and Method Including the Capturing, Indexing and Synchronizing of RBG-Based Graphic Content,” further strengthens and protects the company’s intellectual property and market leadership positions.

“Even in the midst of the global economic shifts that took place last quarter due to historic winter storms in the northeast US, natural disasters in Japan and increasing instability in the Middle East, we continue to see increasing global demand for our products and services,” said Gary Weis, CEO of Sonic Foundry. “Lecture capture continues to make inroads towards becoming a mainstream educational technology on campus, a move increasingly driven by student demand and expectation. We’ve seen a surge in the meeting and events industry, with organizers seeking to complement their face-to-face event with a hybrid meeting, and early adopters of purely virtual meeting technologies instead opting for a blended event webcasting experience. Across all verticals we find organizations who value single-source, multimodal delivery for webcasting, and who are willing to place a premium on our ability to deliver both on-premises, hosted and turnkey webcasting solutions.”

Sonic Foundry will host a corporate webcast today for analysts and investors to discuss its fiscal 2011 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 access the presentation, go to www.sonicfoundry.com/q2. 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.