Sonic Foundry Reports Third Quarter 2009 Results

MADISON, Wis. - July 30, 2009 - Sonic Foundry, Inc. (NASDAQ: SOFO), the recognized market leader for rich media webcasting and knowledge management, today announced financial results for its fiscal 2009 third quarter ended June 30, 2009. Results include: 

• Revenue of $5.0 million, down slightly from 2008 fiscal third quarter revenue of $5.1 million.
• Quarterly loss of $162 thousand equating to $0.00 per diluted share compared to an $829 thousand loss or $(0.02) per diluted share in the fiscal third quarter of 2008.
• Non-GAAP net income of $91 thousand or $0.00 per diluted share compared to non-GAAP net income of $210 thousand or $0.01 per diluted share in the fiscal third quarter of 2008.
• Billings of $5.0 million compared to $5.5 million in the fiscal third quarter of 2008.
• Service revenue of $2.4 million, up 17 percent from fiscal Q3 2008.
• Unearned revenue balance of $4.7 million at June 30, 2009 compared to $3.6 million at June 30, 2008.
• Operating expenses of $4.1 million, down 11 percent from $4.6 million during the fiscal third quarter of fiscal 2008.
• Gross margin of 78 percent, up from 74 percent for the fiscal third quarter of 2008.

Non-GAAP net income primarily excludes all non-cash related expenses of stock compensation, depreciation, amortization, personnel and program reduction 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.

Expense reductions and cost control resulted in achieving $0.00 per diluted share for the second consecutive quarter and quarter over quarter EPS improvement for the fifth consecutive reporting period. The company now believes it will exceed 20 percent revenue growth for the full year at current operating expense levels. Previous company revenue growth guidance for fiscal 2009 was estimated to be between 15 and 20 percent, or $18 million to $18.7 million. 

The company increased the balance of unearned revenue by $1.1 million or 29 percent from June 30, 2008 to its current end of quarter level of $4.7 million. Of the unearned revenue balance, the company expects to realize $1.8 million in the upcoming quarter. Gross margin was 78 percent, up from 74 percent in the prior year, primarily due to realizing a decrease in the cost of manufacturing Mediasite Recorders.

Billings to higher education customers totaled 64 percent of total billings for the third quarter of both fiscal 2009 and 2008. Total international sales accounted for approximately 25 percent of the quarter's billings, compared to 15 percent for the third quarter of fiscal 2008.

The company derives a substantial portion of revenues from public colleges and universities based in the United States. Quarterly results, particularly new product sales, were impacted by the continuing economic crisis, budget delays now affecting the vast majority of state governments and the delay in distributing federal stimulus money earmarked for the U.S. higher education sector. As these issues resolve themselves, the company believes that its product and service offerings are very well aligned for the initiatives now taking place among these organizations, including helping state institutions address oversized classes, reduced teaching capacity and the need to re-educate an unemployed workforce.

Total services revenue was $2.4 million for the quarter, an increase of 17 percent from the third quarter of fiscal 2008. Services revenue includes Mediasite customer support contracts, as well as training, installation, rental, event and content hosting services. The increase was primarily due to event and content hosting services plus support contracts on new Mediasite Recorders and recurring renewals of support contracts entered into previous years.

During the third quarter, the company held its third annual User Conference, which was the largest to date.  The conference was offered on-site in Madison, Wisconsin, as well as completely online via Mediasite for those conference attendees facing travel restrictions and budget constraints.

Other highlights of the quarter include:

• Webcasting Michelle Obama's only university commencement address from the University of California Merced
• Launching the webinar, "A Recommended IT Roadmap for Campus-wide Lecture Capture: Your Courses Online Now" with featured analyst firm Gartner
• The company's most successful year exhibiting at InfoComm 2009, the world's largest professional AV technology event
• Continued event webcasting partnerships with the leading higher education and training events, including EduComm, Sloan Consortium and the American Society for Training and Development

"We are very proud of the company's year-to-date growth, margin expansion and expense control, all in an unprecedented economic climate," said Rimas Buinevicius, chairman and CEO of Sonic Foundry. "We believe we have just gone through the worst portion of the recession and are beginning to re-emerge economically, with the technology sector leading the way. We believe this ultimate return to normalcy should help fuel future growth in all the business segments we serve, both domestically and internationally."

Sonic Foundry will host a corporate webcast today for analysts and investors to discuss its third quarter fiscal 2009 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.

The company received notice from NASDAQ on October 22, 2008 that, in response to extraordinary market conditions, NASDAQ was suspending enforcement of the minimum bid price requirement of $1.00 per share for 90 days. Sonic Foundry received additional notices on December 23, 2008 and March 24, 2009 extending the suspension of the minimum bid price for an additional 90 days. On July 14, 2009, Sonic Foundry received notice from NASDAQ that enforcement of the minimum bid price requirement would be reinstated on August 3, 2009. Since the company had 141 calendar days remaining in its bid price compliance period when suspension began, Sonic Foundry has until December 21, 2009, to regain compliace.

EXPLANATION OF NON-GAAP MEASURES

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.

• 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.

• 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.

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.

• 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.

• 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.