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Wednesday, September 9, 2009

More Evidence of the Mediasite Franchise

Trading volume in Sonic Foundry (SOFO, $0.62) picked up in August, averaging 61 thousand shares per day compared to a three-month average of only 38 thousand per day. We are pleased to see increased trading volume and also glad to see institutions such as Oberweis Asset Management (269,000 shares) and Pennsylvania Public School Employee Retirement System (83,200 shares) initiate positions during the June quarter (see this link to enlarge - source Nasdaq.com):

That said, there remain some big sellers -- leading to a flat share price -- which is surprising given favorable fundamentals: revenue growth greater than 20% for fiscal 2009 (end September) with break-even operations. Short interest also remains shockingly high given light trading volume (although small as percentage of float) -- also from Nasdaq.com:

Meanwhile, certain other small cap stocks have recovered nicely in recent months. The only explanation for lagging SOFO: the stock continues to fly below the radar as the Market is implying that the company will run out of cash within the next year. While there are certainly risks, our model shows Sonic Foundry generating free cash flow over the next twelve months so long as growth remains similar to current trends (we discussed in earlier post).

Before we touch on very tangible evidence of the growing Mediasite franchise, let's first point to another opportunity for Sonic Foundry that is top of mind around the world: preparation for Swine Flu. A couple of weeks ago, the U.S. government stressed that schools should be prepared to keep education going even if many students can't attend - from an AP article sourced via the Chicago Tribune:
  • Speaking at an elementary school on the first day of classes in Washington, Duncan released recommendations on how educators can ensure instruction continues should the virus cause high absenteeism or school closings.
  • Schools should be ready with hard-copy packets and online lessons to keep learning going even if swine flu sickens large numbers of students, U.S. Secretary of Education Arne Duncan said Monday.
    • Duncan said schools should evaluate what materials they have available for at-home learning. The latest guidance provides more details on methods schools could use, such as distributing recorded classes on podcasts and DVDs; creating take-home packets with up to 12 weeks of printed class material; or holding live classes via conference calls or "webinars."
    The CDC has detailed guidance on its Web site, including the following:
    • IHEs should plan now for ways to continue educating students who stay home through distance learning methods. IHEs should also examine policy accommodations that might be necessary such as allowing high-risk students to withdraw for the semester, tailoring sick leave policies to address the needs of faculty and staff, or modifying work responsibilities and locations.
    • Increase social distances: Explore innovative ways to increase the distances between students (for example, moving desks apart or using distance learning methods). Ideally, there should be at least 6 feet between people at most times.
    We know many schools are taking the direction seriously - here's a link to UPENN's Web site regarding "Flu Prevention and Preparedness". Further, Sonic Foundry's blog, World of Webcast, noted on 5/20/09 that many customers were already using Mediasite to share Swine Flu news. As "the global leader for rich media webcasting and knowledge management", we see many opportunities for the company to help organizations manage through the situation.

    Okay, now to the tangible evidence that we think represents a still unappreciated positive catalyst: last week, a government "request for quotations" (RFQ) surfaced "for the purchase of Sonic Foundry Mediasite Recorders with Service and Maintenance"- link here. The RFQ is for "The Uniformed Services University of the Health Sciences (USU), located on the National Naval Medical Campus in Bethesda, MD". Salient points from the RFQ directly support our Mediasite franchise thesis:
    • USUHS has determined that Sonic Foundry is the only reasonably available manufacturer to meet the government’s requirement:
    • USUHS has determined that the Sonic Foundry Mediasite RL Recorder is essential to the Government’s requirements and market research has not produced any other companies’ products that meet the agency’s needs.
    • The Sonic Foundry MediaSite integrated platform provides a single manufacturer solution for lecture room capture and delivery of events at the USU over the Internet. The increasing demand for rich multimedia rendering of SOM and GSN courses coupled with the expanding demand for Podcast technology and a truly virtual campus drive the USU’s requirements to advance the use of Internet streaming.
    • All captured content is immediately available through Blackboard, the USU Internet or Intranet. Access can be controlled by UIS’ Active Directory system ensuring that the content can be accessed by the appropriate audience. The Sonic Foundry system integrates with our current information technology and supports our adoption of MS Outlook. Access to the system is only limited by our bandwidth and not per user seat licenses, thus enabling the USU to leverage the technology in support of the USU’s vision of a virtual university delivering distributed learning and CME.
    • Sonic Foundry provides a uniquely integrated solution of hardware and software that will enable the USU to deliver live, On-Demand and Podcasting multimedia content of the USU’s lectures, research findings and CME content. Specifically the new USU Center for Translation Science and the new focus on Traumatic Brain Injury research will be enabled to effectively and widely distribute the results of our research to the broader scientific community.
    Unfortunately, the RFQ also notes one of the challenges we know Sonic Foundry encounters with many large organizations, from government to education to enterprise -- lack of central IT planning and funds:
    • The ability to stream content over the Internet or podcast is possessed by multiple agencies and individual DOD offices/units however it is neither coordinated, seamless, widely available nor centrally funded. Each DOD entity must procure individual systems to meet local requirements.
    Finally, the RFQ also lists exact technical requirements that are likely included to document that Mediasite is, in fact, "the only reasonably available manufacturer to meet the government’s requirement" (as mentioned above). The very specific requirements also highlight the advanced functionality of the Mediasite solution, which we see as a competitive advantage. Once a system is installed and customers begin "Mediasiting", we see the solution as difficult to displace.

    What does the USU RFQ potentially mean for Sonic Foundry's finances? Looking at the draft solicitation document, we find the size of the desired system:
    • One (1) RL Recorder (MSL-CSR-500-Room-Based with EX Server Recorder License), with an additional five (5) RL Recorders (MSL-CSR-500- Room-Based, Rack Mountable)
    So, not a 20 or 30 room installation... yet. Assuming an average selling price of $12 to 16 thousand per unit plus a server license, maintenance, and support, we estimate that Sonic Foundry could possibly see a low six figure transaction.

    Happy investing,

    Jeffrey Walkenhorst

    Disclosure: long SOFO.
    © 2009 Jeffrey Walkenhorst
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