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Monday, January 25, 2010

Sonic Foundry's F1Q10 Report (Thurs): Guidance is the Key; More Examples of the Mediasite Franchise

Based on prior management guidance, our expectations are modest for Sonic Foundry's (SOFO, $5.50) seasonally slow December quarter (report expected Thursday afternoon). Recall that guidance was something to the effect: "December and March quarter revenue should be similar to fiscal 2009 levels with potential for better bottom-line performance on the company's streamlined cost structure." Thus, for F1Q09, revenue might be $4.0 million with another operating loss (albeit narrower Y/Y). Further, public/private school and corporate IT budgets remain tight, which remain a primary risk factor.

Yet, since the Market is forward looking, the key lies in forward guidance -- specifically, an update with regard to the "half dozen multi-million dollar deals" expected this year that "may mark a significant turning point for the company...." Assuming guidance remains intact, we'll come back post-results with commentary on how these deals could translate into meaningful, positive earnings for the company and, quite possibly, a higher valuation. For now, we'll say the following: while the Market views Sonic Foundry as a "show me" story, we still believe the company's approximate $23 million enterprise value gives essentially no credit for the growing Mediasite franchise.

What gives us confidence in "the franchise"?

First, as someone pointed out with regard to our "Which Way from Here?" post, the market need is readily apparent for high quality video/slide capture: "...this, more than anything you've written the last year, just really shows how invaluable Mediasite is becoming!" Please see my video post to understand what he/she means with this statement.

Second, by following Mediasite on Twitter, we saw the following Twitter post the other day:

From http://twitter.com/weslinda [who works at Johns Hopkins University]:
  • We had 11,000+ views of our @mediasite videos last year. I wonder if we can triple it in 2010? 4:16 PM Jan 20th from Seesmic [if we read correctly, these views were only for his particular group, not all of JHU]
Response from http://twitter.com/robgrau [who works at North Carolina State University]
  • @WesLinda We had 8500+ #Mediasite views in last 7 days. JH student body not as big as NCSU, but you should still triple your views easily. 6:04 PM Jan 20th from web
These posts remind us of a Sonic Foundry Webcast in June 2008 that featured Penn State Hershey Medical Center:

The presentation included a graph of Mediasite recordings to-date (through June 2008):

Impressive uptake and we'd love to see a current update from Dr. Scaduto. Based on JHU and NCSU Twitter commentary, a very rational guess is that similar growth continued during 2H08 and through 2009 at Penn State, as well as at most other Mediasite customers, all of which use the solution daily to capture and organize hundreds of hours of content. Such growth exemplifies what we mean when we speak of "the Mediasite franchise". We wonder how many classes have been captured by KAUST (in Saudi Arabia) since opening in September.

Finally, remember what Sonic Foundry relays in the company's 10-K:
  • Repeat orders: Many customers initially purchase a small number of Mediasite Recorders to test or pilot in a department, school or business unit. A successful pilot project and the associated increase in webcasting demand from other departments or schools leads to follow up, multiple Recorder orders as well as increased Mediasite Server capacity. In fiscal 2009, 62 percent of billings were to preexisting customers compared to 59 percent in fiscal 2008.
We think potential for incremental repeat orders will remain material this year and in future years.

While the Market tends to fall all over the most popular tech companies and award rich multiples, we're not interested in buying fairly/richly valued mainstream companies with no margin of safety. We typically want to acquire ownership stakes in unloved or under-followed franchise-type companies with a margin of safety. In this case, we continue to see a favorable risk/reward profile for below-the-radar micro-cap Sonic Foundry.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO.

© 2010 Jeffrey Walkenhorst
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  1. Jeff,

    First, thanks for being so diligent on following SOFO. Your updates are better than any analyst could ever provide.

    Second, I'm also sure you viewed the Mediasite webcast from Big Bend Community College in Washington state. Big Bend was spending hundreds of thousands on video conferencing but their budget was cut. So they decided to go with Mediasite - lower cost - better results. What a great testimony to your franchise thesis.


  2. Hello Ray,
    Thanks for chiming in and your support. Happy to relay my analysis (from an owner's perspective).

    I did catch most of the Big Bend Webcast. Agreed - another excellent example of the growing Mediasite franchise. The fact that the solution works so well for so many customers and saves $$$ should spur further adoption, which bodes well for investors.



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