Sonic Foundry Reports Third Quarter 2008 Results

MADISON, Wis. - July 31, 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 third quarter:

• Revenue totals $5.09 million, up 8 percent from fiscal Q3 2007
• GAAP net loss of $829 thousand or $(0.02) per diluted share
• Non-GAAP net income of $210 thousand or $0.01 per diluted share
• Total end customer billings reach $5.5 million
• Service revenues of $2.03 million

Non-GAAP net income primarily excludes all non-cash related expenses of stock compensation, depreciation, amortization and one time severance payments and includes the cash impact of service billings not recognized as revenue. Reconciliation between GAAP and non-GAAP results is provided at the end of this press release.

In January 2008, the company announced the initiation of cost savings measures that were designed to focus its efforts on growing key vertical markets while positioning the company towards breakeven or better operations. Consequently, fiscal Q3 2008 resulted in positive non-GAAP net income of $210 thousand or $0.01 per share. Likewise, operating expenses decreased 10 percent from Q3 2007 due to this successful cost reduction initiative.

The company maintains an accumulated $3.6 million of unearned revenue on the balance sheet at June 30, 2008, of which it expects to realize $1.4 million in the upcoming quarter. Shipments of recorder units increased 15 percent while service billings were $2.4 million representing a 20 percent increase over fiscal Q3 2007. Gross margins were $3.8 million or 74 percent for the current quarter, compared to $3.5 million and 74 percent in the previous year.

The company's sales efforts have continued to build within the higher education market and through its webcasting-as-a-service offerings. Quarterly billings to higher education customers totaled $3.5 million or 57 percent of total billings. Recent trends such as high gas prices and the slowing economy are driving more students, particularly adult learners, to seek online education options. Similarly, demand for lecture capture within undergraduate, community college and blended learning programs is beginning to demonstrate growth. This development represents an emerging trend beyond the traditional academic customer base for the company, which has primarily consisted of graduate, distance learning and technical degree programs. The company has sold to more than 600 education customers to date.

Expanded adoption among existing higher education customers account for additional efficiencies in the sales process. Domestic higher education licensed sales for Q3 2008 included Tulane University, University of North Carolina-Chapel Hill, University of Wisconsin-Madison School of Business, Washington State University and Youngstown State University. International sales continue to strengthen with new customers at Oxford University, Wales College of Medicine, Universidad Carlos III de Madrid, University of Economics- Praque and Thammasat University, Thailand.

The company also continues to transition its corporate vertical marketing efforts from on-premise to outsourced webcasting services. The shift in sales strategy added new customers to Sonic Foundry's Event Services group which included Cardinal Health, Sangamo BioSciences, General Dynamics, Clemson University and Drinker Biddle.

Additional highlights of the third quarter include:

• The introduction of Mediasite 5.0 and the next generation of Mediasite RL and ML Recorders at InfoComm in Las Vegas. The release includes more than 100 new features.
• Representation from nearly 200 individuals, representing 30 states, seven countries and 95 organizations at UNLEASH 2008, the company's second annual Mediasite User Conference.
• The announcement of the 1000th Mediasite customer, Penn State University Dickinson School of Law.
• Continued partnership with the leading higher education conferences in the nation including the Sloan Consortium, EduComm and the Chronicle of Higher Education.

"We are delighted by the tremendous improvement in our operating results this quarter. Our decision to focus on key vertical markets and match our offerings to the developing economic climate is now paying off. We're beginning to witness key evolutionary trends related to the greater adoption of rich media communications," said Rimas Buinevicius, chairman and CEO of Sonic Foundry. "We expect these advancements to continue as both the academic and corporate enterprise further embrace rich media lecture capture and webcasting. We believe Sonic Foundry is offering the right product and service mix at the right time to fuel this transformation in the way our customers teach, work and learn."

Sonic Foundry will host a corporate webcast today for analysts and investors to discuss its third 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.

• 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 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.
• Personnel and program reduction costs: We have excluded the additional costs incurred as a result of our cost reduction plan which was communicated in January 2008. These costs include severance costs associated with employee reductions as we better aligned ourselves with key vertical markets.  Also excluded is a one time charge associated with an early extinguishment of a lease.
• Service 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.